This article is from the Australian Property Journal archive
Improving fundamentals in the office market, coupled with strong leasing and the addition of new income from acquisition has given Commonwealth Property Office Fund a head start to the year.
The fund lifted its net profit to $82.2 million for the six months to December 2005, an increase of 36.4% when compared to $60.3 million recorded in the previous corresponding period.
CPA fund manager Charles Moore said underlying this result were a number of changes to the composition of fund earnings.
“Net property income had increased significantly following the receipt of new income from the acquisition of a 100% interest in 108 North Terrace, Adelaide and the remaining 50% interest in 259 George Street, Sydney.
“Importantly, net property income on a like-for-like basis (only including assets owned fully for both six-month comparison periods) increased by $0.6 million,” he said.
He added that the completion of the 2 Southbank Boulevard, Melbourne development project also boosted net property income, with this asset now generating rental income rather than interest income.
Overall interest income during the period fell, largely as a result of the maturation of the first $205 million industrial portfolio receivable in January 2005, which had earned the fund an interest rate of 8.1% for the six months to December 2004.
While this negatively impacted interest income significantly, the use of the proceeds from this receivable to retire debt resulted in lower average gearing, and significantly lower borrowing costs for this six-month period.
Under AIFRS, total earnings per unit for the six-month period were 5.29 cents per unit, compared to 4.15 cents per unit for the previous corresponding period.
Total gross assets grew to $2.88 billion, with net tangible asset backing per unit increasing marginally from $1.14 per unit (AIFRS-adjusted) to $1.15 per unit as a result of positive net independent revaluations across the portfolio.
The fund paid a distribution of $78.0 million for the six months to December 2005, compared to $70.1 million for the previous corresponding period.
This equated to a distribution of 4.83 cents per unit for the six months to December 2005, which is in line with the previous corresponding distribution.
Moore said the fund undertook significant acquisition and development activity which met key investment criteria, and also divested a non-core asset over the six months.
In July 2005, CPA bought a 50% interest in a 99-year leasehold for the development at 5 Dawn Fraser Avenue, Homebush. Construction is underway on an A-grade office building with a total net lettable area (NLA) of approximately 23,267 sqm, which has been substantially pre-committed to by the Commonwealth Bank of Australia.
Total project cost on completion is $95.0 million.
The fund also bought 108 North Terrace, Adelaide for a total cost of $76.9 million and the remaining 50% interest in 259 George Street, Sydney for a total cost of $132.5 million in October 2005.
Meanwhile in December 2005, CPA sold its 33.3% interest in 475 Victoria Avenue, Chatswood for $36.9 million.
Moore said the decision to sell this asset was consistent with the fund’s active investment strategy, based on this market’s deteriorating outlook and the ensuing risk to the Fund’s income going forward.
In the six months, the fund successfully negotiated 89,701 sqm in new leases and renewals.
“This achievement reflects an ability to take advantage of the upturn in the Sydney CBD leasing market and favourable fundamentals across Australia’s other major office markets,” Moore said.
A rental reviews over 137,999 sqm of tenanted space were undertaken resulting in an average rental increase of 1.6%.
In the remaining six months of the 2006 financial year, 248,493 sqm is subject to review, with 83% of the reviewed area subject to fixed reviews ranging between 3% and 6% and the remaining 17% to be reviewed to market.
Ten assets in the fund’s portfolio were independently revalued, resulting in an increase from previous valuations of $37.0 million
“Market evidence suggests that the Australian office property sector has entered the upturn stage of the cycle, supported by positive macro-economic factors and with the majority of CBD office markets achieving positive net absorption over the six months ended 31 December 2005,” Moore said.
He added that both the Brisbane and Perth CBD markets continued to perform strongly over the first half of the 2006 financial year, with solid demand fuelled by growth in the resources sector. The Sydney CBD office market also performed well, with enquiries translating into leasing activity.
“The Sydney market is expected to experience increasing demand for office space, supported by favourable business conditions and rising white collar employment. The resulting upturn in demand should exceed supply. In turn, vacancy rates, effective rents and incentive levels should improve over the medium term.
“While demand is forecast to be strong in the Melbourne CBD market, Moore said supply additions in the short term are expected to exceed demand. However, market fundamentals are expected to improve during the 2006 calendar year,” Moore concluded.
By Nelson Yap
