This article is from the Australian Property Journal archive
DEXUS has had $1 billion wiped from the value of its portfolio – about 6.0% of its total value, with its office towers taking a 7.7% haircut amid rising interest rates and structural shifts in the workplace.
The major ASX-listed property group has had 175 of its 182 assets, comprising 32 office properties and 143 industrial properties, externally valued as at 30th June. Its portfolio was held at $17.8 billion in its interim results.
Dexus CEO Darren Steinberg said the value of the office portfolio decreased circa 7.7% over six months on prior book values driven by higher capitalisation rates and discount rates, partially offset by market rental growth.
The industrial portfolio decreased by circa 0.2% on prior book values, with strong rental growth largely offsetting the impact of higher capitalisation rates and discount rates.
“We expect well-located quality assets to continue to outperform secondary assets and locations against an uncertain macroeconomic backdrop,” Steinberg said.
The weighted average capitalisation rate across the total portfolio expanded by circa 32 basis points over six months, from 4.80% to 5.12%. The weighted average capitalisation rate of the office portfolio expanded by 32 basis points to 5.21%, and the industrial portfolio weighted average capitalisation rate expanded by circa 31 basis points to 4.77%.
Despite the decline, Moody’s Investors Service vice president Saranga Ranasinghe said Dexus’ gearing levels remain sound.
“Dexus’ office asset value decline of around 7.7% is in line with our expectations and follows a reduction of 1.8% in the six months ended December 2022. Although the devaluations will likely increase Dexus’ gearing level, the REIT’s reported gearing of 25.6% for the first half provides sufficient headroom against the high end of the target range of 30%-40% and covenant levels.
Given the high interest rate environment and relatively weak fundamentals for office assets, we expect further declines in office asset values in Australia over the coming months. Still, we expect rated Australian REITs, including Dexus, to maintain their credit quality. Their gearing levels would remain within our rating expectations, helped by solid financial buffers, diverse portfolios of good quality assets and earnings growth.” said Ranasinghe.
The Australian office sector in particular has been awaiting the latest round of revaluations as values of CBD towers were slashed overseas. AREITs face eroding cash flows, rising capitalisation rates and higher asset valuation risks amid tough near-term conditions, as changing work habits challenge the structural demand outlook with vacancy rates high and occupancy rates low.
Dexus’ has just confirmed that its 44 Market Street tower in the Sydney CBD had sold at a 17.2% discount to book value, and it is also reportedly selling 1 Margaret Street at a 21% discount to the book value.
Dexus itself said transaction markets are “likely to remain soft” over the next six months in its most recent quarterly update.
Moody’s has forecast office values to fall because of weaker market fundamentals and the increasing cost of debt. Barrenjoey analysts have warned office tower prices could come off by 15% to 20%. Colliers is expecting capital values to drop by an average of 10% from peak-to-trough, before the market recovers in 2024, a much less turbulent trajectory than the GFC which saw some assets suffer 25% in devaluations.
Charter Hall last week announced 3.7% had been cut from the value of its office portfolio.
