This article is from the Australian Property Journal archive
AUSTRALIA’S biggest owner of office towers, Dexus, is calling the bottom for values and vacancies in the battered sector, as a clearer picture of company’s workspace requirements emerges and an interest rate cutting cycle nears.
“While there is uncertainty around the global outlook, forecasts for Australian interest rates to fall in 2025 bode well for asset values in the years ahead, creating attractive opportunities for investors,” said Dexus head of research, Peter Studley, in the ASX-listed company’s latest Real Asset Review.
“The factors needed for a recovery in office markets are now in place – namely a fall in the supply pipeline and growth in services employment,”
Dexus witnessed first-hand the plunge in office values in recent years as working from home and flexible working during and since COVID emptied offices and forced a re-think from tenants on how much floorspace they required.
“The adjustment to hybrid working models is now well advanced and the merits of offices for collaboration are well understood,” Studley said.
“High quality buildings in core central locations are set to outperform.”
Dexus reported a relatively modest 3.2% haircut in property values over the past six months, of $267 million, but that followed downwards revaluations driving it to a massive $1.58 billion statutory loss for FY24, and it has been selling major assets at discounts of more than 30% to peak values.
It is set to offload its 100 Mount Street tower in North Sydney, which is owned together with its flagship wholesale fund, for $600 million. That deal is closing some 18 months after the 2019-finished tower was put to the market with reported hopes of $800 million.
Late last year Dexus also confirmed $443 million in divestments across the Pyrmont headquarters of Domain and the 145 Ann Street tower in Brisbane. Those deals were struck a discounts to peak values at 35% and more than 20% respectively.
Dexus has also recently sold 5 Martin Place in Sydney for $296.2 million, reflecting a discount of over 30% from peak value.
“Valuations appear to be stabilising for most real estate sectors and are lifting for some, like super-regional retail. History has shown that such periods typically lead to above average returns. For example, in the decade following the GFC, office values grew by 75%,” Studley said.
The office sector is expected to improve in 2025, with demand increasing, most notably in Sydney.
“Much of the uncertainty around hybrid working seems to be behind us and the vacancy cycle at its peak. However, signals are still mixed from market to market,” Studley said.
Studley said yields “now look more attractive”.
“Two years ago, A-grade office buildings in Sydney were yielding 4.8%. Now they’re yielding around 6.3%. Industrial, retail and healthcare assets are also producing higher yields. Within the real asset universe, yield spreads between different investments have widened, creating an expanded opportunity set for investors.”
The start of 2025 is likely to be a turning point for real assets as the interest rate cycle moves to an easing phase, with some chance of a rate cut as soon as next month.
“The re-pricing which has occurred to date has reset values and lifted yields, making real assets more attractive to investors. Deal flow is expected to improve significantly in 2025 assuming stable to falling interest rates.”
However, he noted there is uncertainty around the outlook for inflation, global growth and interest rates given a change of administration in the US as Donald Trump is sworn in for a second term as President, and the recent mini-spike in bond yields.
Dexus expects a higher number of transactions in 2025.
Real estate transaction volumes firmed by 6% in 2024 and there are further transactions in the pipeline.
“Uncertainty around interest rates is diminishing. Investors are increasingly confident that we are at the peak of the tightening cycle, with the next move more likely down this calendar year,” Studley said.
“The office sector, which faced elevated uncertainty in 2023, saw transaction volumes surge 16% higher in 2024. This uptick signals improving liquidity and a growing confidence in valuations.”
Office tower owner Investa offered a similar bright outlook for the office sector in last month’s Investa Inside outlook.
“Australia’s major CBD office markets are showing signs of early cycle recovery, with both leasing and capital markets expected to improve through 2025,” Investa head of strategy and research David Cannington said.
“Headwinds from the post-COVID work transition appear to be easing, as hybrid work patterns settle. Lower inflation and anticipated interest rate cuts will ease pressure on Australian business conditions.
“We expect macro conditions will support positive leasing demand and capital growth in the coming year.”
