This article is from the Australian Property Journal archive
THE resilience of metropolitan markets since COVID has helped Centuria Office REIT (COF) to a solid set of first-half numbers, but Australia’s largest listed pure-play office fund predicts office supply will decrease in the medium term.
About 92% of COF’s portfolio is exposed to metropolitan, fringe and near-city office markets – that is, markets outside the Sydney and Melbourne CBDs – and consists of 22 modern office buildings worth $2.1 billion.
In contrast, COVID left CBDs emptied, and occupation hasn’t recovered to pre-2020 levels as more people spend more of their professional lives working from home, leaving some office vacancy rates at long-term highs.
Since 2020, COF has leased more than 67% of its portfolio, totalling more than 197,000 sqm.
“Four years on from the start of COVID’s impact and, despite flexible working arrangements having become somewhat ubiquitous, many Australian office markets experienced positive net absorption throughout 2023. This suggests many tenants have already right-sized, and tenant demand may be finding an equilibrium,” said COF fund manager and Centuria head of office, Grant Nichols.
“Many tenants have not decreased their footprint and the office leasing distress predicted by some market speculators has not materialised, particularly in the markets COF is exposed to.
“In fact, metropolitan office demand continues to materially outstrip the Sydney and Melbourne CBDs. In particular, the Brisbane fringe market incurred the strongest net absorption in 2023 and has limited pending supply.”
COF has a 20% portfolio weighting to the Brisbane city fringe.
Nichols expects future office supply to materially reduce over the medium-term.
“Development feasibilities have been impaired due to rising construction costs, increased finance costs and softening capital market transactions, pushing economic rents significantly above prevailing rents in the majority of Australian office markets. This is likely to provide strong future tailwinds for the markets COF is exposed to, especially in light of forecast population and white-collar employment growth.”
During the first half, COF leased 28,659 sqm across 23 transactions, representing 9.7% of portfolio net lettable area. Among those it addressed it most significant FY25 lease expiry, relating to its largest tenant, with the Commonwealth government committing to a further 10-year term at 235 William Street in Northbridge.
COF maintained high occupancy of more than 96% and its portfolio weighted average lease expiry increased to 4.4 years.
Funds from operations (COF) was $41.8 million, or 7.0c per unit, below the prior corresponding period (pcp)’s $48.6 million and distributions were 6.0c per unit. Both were in line with FY24 guidance. The latter provides a distribution yield of 9.6%.
COF reaffirmed its FY24 FFO guidance of 13.8c per unit and distribution guidance of 12.0c per unit.
During the period, COF maintained liquidity with $88.2 million pro forma debt facility headroom, a 2.7-year weighted average debt expiry and no debt expiring until FY26.
