This article is from the Australian Property Journal archive
AUSTRALIA’S largest office landlord, Dexus is expecting office vacancies to rise in the major CBD markets as the pandemic forces businesses to reassess their use of floorspace.
Full year net profit fell 23.3% to $983 million, largely due to the resulting heavy pressure on office property values. Net revaluation gains of investment properties of $612.4 million was $160.7 million lower than the previous year.
These revaluation gains primarily drove the 3.6% increase in net tangible asset per security backing to $10.86.
Underlying funds from operations grew by 1.0% to 63.5 cps, despite the impact of rent relief provided. Rents collected totalled 98%, including 92% in the COVID-impacted June quarter.
AFFO and distributions was 50.3 cps, consistent with the prior year and in line with revised guidance provided at the beginning of June, but came in below anticipated growth of 5.5% before the pandemic.
“Office property is a long-term asset class and has shown its resilience to perform through the cycle. However, with Australia in a recession, we are preparing for subdued tenant demand and increased vacancy levels in our core office markets. In this environment we remain focused on maintaining high portfolio occupancy,” Dexus chief executive officer, Darren Steinberg said.
Office vacancy rates across Australia increased from 8.3% to 9.5% over the six months to July, according to the Property Council of Australia. Sydney and Melbourne provided a strong buffer against the initial impact of COVID-19, both coming off extremely tight rates. Sydney increased from 3.9% to 5.6% as demand softened, while Melbourne’s softening from 3.2% to 5.8% was initially impacted by a large tranche of new supply.
Office portfolio occupancy dipped from 98.0% to 96.5%. Like-for-like income growth was 2.4%, less than FY19’s 3.4%, impacted by rent relief measures and a provision for expected credit losses.
Weighted average lease expiry was 4.2 years, down from 4.4. Average incentives increased from 13.4% to 17.1%, and the portfolio’s weighted average cap rate firmed from 5.15% to 4.97%.
“In times of uncertainty, high-quality and well-leased assets can be expected to hold their value better than lower quality assets due to their appeal to both occupants and purchasers as well as their relative scarcity,” Dexus said. Prime grade buildings account for 94% of Its office portfolio.
“We will also make decisions that set the group up to perform over the long term. We will selectively recycle assets, which may result in short-term earnings dilution but will enable us to reinvest into opportunities that we believe will drive stronger investor returns over the next decade,” Steinberg said.
The group is also reportedly nearing a $450 million deal to sell its 452 Flinders St building.
Dexus has progressed planning for “city shaping” projects in the group’s $10.6 billion development pipeline. That includes the $2.5 billion Central Place development within the future tech hub on Sydney’s city fringe.
Some $1.1 billion of developments were completed over the year. Among them were 240 St Georges Terrace in Perth, The Annex at 12 Creek St in Brisbane and 80 Collins St in Melbourne, which it acquired in a record deal in 2019, and where it reported record rental rates for the CBD.
“In recent years we have demonstrated our ability to capitalise on opportunities while also preparing for periods of uncertainty,” Steinberg said.
“We have improved our portfolio composition through the acquisition of quality properties with solid fundamentals to drive long-term returns, while taking advantage of the good years to recycle properties in non-core locations.”
Dexus increased its exposure to the humming industrial sector to $5 billion. Portfolio occupancy remains at high at 95.6% although slipped over the year due to vacancy at Axxess Corporate Park.
Dexus expanded its existing relationship with GIC through their acquisition of an additional 24% interest in the Dexus Australian Logistics Trust (DALT), while the groups established a new joint venture to acquire a 50% interest in Rialto Towers in Melbourne.
About $955 million of equity was raised for new and existing unlisted funds. This week, it launched the first in a series of closed-ended opportunity funds that will hunt enhanced returns through value-add, development and “special situation” assets.
Gearing was 24.3%, well below the target range of 30% to 40%, and the group has $1.6 billion of cash and undrawn debt facilities.
