This article is from the Australian Property Journal archive
CENTURIA’S flagship office trust is looking to weather office market headwinds in the short-term, ahead of more people returning to the office and the completion of the Sydney Metro and Brisbane Cross River Rail projects in the coming years.
Population growth is also a key reason for Centuria Office REIT (COF)’s positive outlook, despite it posting a soft set of numbers in its annual results yesterday.
COF was able to meet guidance with $82.2 million in funds from operations (FFO), at 13.8c per security – albeit at 11% lower than FY23 – and it fell further into the red with a $168.7 million statutory loss after the previous year’s $91.9 million loss.
FY25 FFO guidance was lower again at 11.8c, and FY25 distribution guidance of 10.1c. Distributions fell from 14.0c to 12.0c per security in FY24.
Like-for-like portfolio valuations reflected a $90 million decrease over six months, showing a 4.5% decline in values amid uncertainty of office requirements and high interest rates. Its portfolio of mostly metropolitan and near-city office assets has a book value of $1.913 billion.
“We’re still pretty optimistic about the medium-term, and we think we’re set up very well now just to get through the short-term,” COF fund manager Belinda Cheung told Australian Property Journal.
“There are a number of macro-economic trends that are playing well to the office market.”
She noted Australia’s strong population growth forecast, and that around 27% of the population is office workers.
“For us, it’s a sign for future office demand.
“And more recently, we’ve seen a lot more sentiment and a lot more talk about return to office. It started off with some of the larger corporates, and then the banks were talking about it, and now the NSW government have also mandated it.”
NSW Premier Chris Minns sent out a memo last week that ordered public service workers to attend work in the office at least three days a week. Public servants in Victoria have a similar expectation in place.
“For a portfolio like ours, 25% of our tenants are government tenants – it’s that way because our buildings are very attuned to having government tenants., The floor plates are generally quite large, and it’s just what government tenants gravitate towards. So we’re hoping that there will be future leasing tailwinds as a result of this return-to-work movement,” Cheung said.
Major rail projects in Sydney and Brisbane are expected to also boost the return.
“We’re pretty excited Sydney Metro and the Brisbane Cross River Rail will be opening soon. It really opens up that metro office market to a broader population.
“In Sydney, getting to the north from south or from the west can be quite difficult. It just takes a little bit longer. But with this metro, commute times will halve. So I’m pretty optimistic about the Sydney Metro being able to bring in a lot more workers from areas where you traditionally probably didn’t see them.”
COF secured 42,722 sqm of leasing in FY24, most being renewals.
“It’s a reflection of the underlying quality and the age of the assets and the style of assets. Our average NABERS rating is five stars. And based on the renewals we’ve been able to do this year, it’s just testament to the fact that tenants want to stay in the buildings that we have.”
At 818 Bourke Street in Melbourne’s Docklands, where COF has struggled with vacancies, it has just secured a 10-year lease with ResetData for an edge data centre of up to 1.5 megawatts in using proprietary liquid immersion cooling technology, which could boost the value of the building by 10% to 15%.
Cheung noted that where the COF is valued on a book basis is less than half of what replacement cost is currently.
“We went for an exercise trying to figure out if we were to build a brand new building in Sydney metro, how much would it cost? And we did that analysis for 2020 and we did another one at 2024. And what we found in that exercise is that the cost of construction has gone up by 40%. But it’s not just the cost of construction. It’s also the cost of leasing, the cost of financing. Everything adds up,” she said.
“And the replacement cost that we’ve calculated, or the development feasibility, works out to be $15,000 a sqm.
“So where COF is trading on the market right now implies a discount. If you take that discount to the valuation per sqm, that’s at about 5,500 sqm. So that’s almost one third of what the replacement cost is.”
COF recently refinanced $862 million of its debt portfolio, giving it more headroom in its debt covenants. Its loan-to-value ratio increased from 50% to 60%. As part of the debt refinancing it was also able to push out debt maturity, from weighted basis of basis two years to four years.
During the year, it sold four assets totalling $139 million, an an average 2% discount to book.
“It’s very good result considering a lot of the wider negative sentiment around office. And what we’ve used the proceeds to repay debt, which has then reduced interest. Interest rates are really high, and we’re trying to find ways to mitigate interest,” Cheung said.
