This article is from the Australian Property Journal archive
THE return to the office and strong population growth has Australia’s largest pure-play office fund, Centuria Office REIT (COF), buoyant about the sector’s medium- and long-term prospects, as it posts healthy leasing numbers and high occupancy rates across its $1.9 billion portfolio.
During the half, COF delivered funds from operations of $34.7 million, or 5.8c per unit, down from $41.8 million or 7.0c per unit in the prior corresponding period, and distributions of 5.05c per unit were paid to shareholders, in line with FY25 guidance.
COF currently manages a modern office portfolio of 19 assets worth $1.9 billion, with an occupancy of 92.2% and a 4.2-year weighted average lease expiry.
“The market occupancy that we’ve seen this period is 83.9% and we have performed at 92% occupancy. So we’re well above where the market is trading at the moment. And that’s partially thanks to the leasing that we’ve done this half,” COF fund manager Belinda Cheung told Australian Property Journal.
COF has secured 12,611 sqm of leasing over 23 deals across its portfolio, covering 4.6% of the portfolio’s net lettable area (NLA). Since 2020, the office sector has been battered by COVID-enforced working from home and high interest rates, wiping out huge chunks of assets’ values, but COF has managed to address and mitigated expiries by leasing 81% of the portfolio’s NLA in that time.
During the first half, COF also saw a healthy leasing spread of nearly 4%.
“That’s been a really fantastic piece for us because it also wraps into the whole valuations process. If market rents increase, it also supports some growth in the valuations,” Cheung said.
“Similar to leasing, we’ve gone through a few cycles of valuation adjustments, but we’re starting to see these adjustments moderate. In our portfolio alone, we noticed that 37% actually recognised an increase in valuations or had stabilised.
“Valuations had been under pressure for a few cycles across the entire office sector, and now we’re starting to see recovery in some assets.”
The centrepiece of this for COF has been its 818 Bourke Street building in Melbourne’s Docklands, an extension of the CBD which has traditionally struggled to attract tenants despite intensive commercial and residential development this century.
At 818 Bourke Street construction has commenced on a 1.1-megawatt liquid immersion cooling data centre through a 10-year lease to ResetData, with works expected to be completed in the June quarter. The works involve converting underutilised office space to data infrastructure, facilitating high-density data solutions for people nearby. The conversion of the empty office space to a data centre has resulted in a 10% uplift in the property’s valuation.
Office space requirements to boom
Cheung said COF holds a “very positive” outlook for the ongoing return to the office, encouraged by mandates seen going back to 12 to 18 months.
“It started with a lot of the large tech companies in the US bringing in mandates, but we’ve also seen that translate in Australia to some of the other large corporates, large banks, and (NSW Premier) Chris Minns mandated his NSW government staff to come back to the office at least three days a week.
“These are all really positive signs that the sentiment is improving around return to work.
Cheung said COF is also “really encouraged” by the population growth forecast. She cited CBRE data that estimated 15% population growth in Australia over the next 10 years – equivalent to around four million people – requiring 800,000 sqm of office per million people, or 3.2 million sqm in total.
“To put that into context, 3.2 million sqm is about the Adelaide and Perth CBDs combined.
“It’s all in all a very, very positive medium and long-term outlook for the office sector.”
COF is confident in the make-up of its portfolio heading into a period of change for the office sector, amid the ongoing return to the office and an anticipated rate-cutting cycle, and which is tipped to see more transactions as buyers and sellers see eye-to-eye on pricing.
“We really look at our portfolio construction and where we want the portfolio to sit in the future. The COF portfolio is 93% A-grade. And this has changed a bit over time. We’ve really tried to sell off assets that we deem no longer core to the portfolio. And I think we’ve gotten to a pretty good point at the moment where the average age of the asset is still quite young,” Cheung said.
“And there’s no pressure from banks either to sell assets. Banks are really supportive of assets that are of high quality, like the COF assets.”
COF completed a refinancing during the year across its portfolio and was able to renegotiate debt covenants.
“Where we’re sitting at the moment, there’s more than sufficient headroom to that debt covenant. So we’re not under any pressure to sell assets,” Cheung said.
“I think at this point in time, if you sell an asset now, it’ll be difficult to buy it at that price point in the future again. This depressed pricing I don’t think will hold for very much longer, especially when we’re seeing valuations start to increase or stabilise.”
