This article is from the Australian Property Journal archive
PROPERTY group Charter Hall has taken a $1.9 billion hit to the value of its $30 billion office portfolio, as the office market faces a reckoning on values following a period of few deals offering guidance to the changing market.
Australia’s office AREITs are facing 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, according to S&P Global Ratings. The office market shuddered this week with Dexus’ confirmation 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.
Charter Hall is backing the flight-to-quality trend in the office sector and is forging ahead with its plans for the 50,000 sqm Chifley South tower in Sydney.
Its office portfolio came off by 3.7% in value over the six months to June, while the capitalisation rate lifted 29 basis points to 5.0%.
The biggest hit came to its long weighted average lease expiry retail portfolio that includes petrol stations and hotels, down by 7.8% with a 41 basis point rise to cap rates, now at 4.7%.
Its shopping centres lost 2.5% in value and cap rates rose 28 basis points to 5.7%.
Sheds, warehouses and distribution centres inched upwards, by 0.1%, while cap rates rose 35 basis points to 4.5%.
Social infrastructure assets such as childcare centres lifted 0.8% in value, and cap rates lifted 18 basis points to 4.8%.
Across the platform, 2.8% was lost in value and cap rates lifted 32 basis points to 4.8%.
As a result of valuations and transaction activity to date, together with $1.2 billion of development capex, the group’s property funds under management is expected to be circa $72 billion at the end of June, below the $73 billion previously forecast.
The office market has been holding its breath waiting for the June revaluations, expecting broad-brushed markdowns following a period of few major deals landing. MSCI head of Pacific real assets research, Benjamin Martin-Henry has said price discovery has become more and more challenging for both buyers and sellers, resulting in restraint in the market.
S&P Global Ratings’ has said its seven office-focused rated AREITs benefit from a flight to quality and have a strong tenant base, and the more than two-third of its rated REITs can sustain asset value declines of up to 10%, while the rest can sustain declines of up to 25%.
Moody’s has already forecast office values to fall in the coming 12 months 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.
Moody’s has said that given vacancy levels for office remain above historical averages, it expects the highest value declines for office assets and rated AREITs on average will still have around 25% headroom against the high end of their target gearing levels, which are set well below debt covenant levels.
