This article is from the Australian Property Journal archive
OFFICE landlord Dexus, which has just put two Sydney CBD towers up for sale in a major test for real estate asset pricing, says transaction markets are “likely to remain soft” over the next six months.
In its latest Australian Real Estate Quarterly Review, the country’s biggest owner of offices, noted MSCI data that shows transaction activity in the March quarter was the lowest seen for a decade, and said an uncertain cost of capital has made buyers cautious leading to downward pressure on asset values.
“Transaction markets are likely to remain soft over the next six months but volumes are expected to pick up in 2024 as pricing resets.
“While the current phase is characterised by rising interest rates and risk, the next phase may well be one of flat to falling interest rates and growth.
“Occupier demand will be fuelled by Australia’s strong population growth, forecast at 1.5% per annum over the next five years, the highest of any advanced economy,” it said, adding that “capital is likely to return in a rush” given the population growth thematic.
It said an “observable resetting of valuations” would also be a signal for improving transaction volumes.
“Regarding pricing, a discount to net tangible assets in the AREIT market has led to questions about the values of the underlying real estate. While values are adjusting, history has shown that the listed AREIT market tends to under-sell and oversell compared to the unlisted market because it is more sensitive to both interest rate movements and equity market volatility. Typically, when a wide discount gap closes, it is more due to listed pricing increasing than unlisted pricing easing.”
Listed office asset values have held up so far in Australia, but are likely to fall in the coming 12 months because of weaker market fundamentals and the increasing cost of debt, Moody’s Investors Service has said.
There have been major office transactions of late. Office values have come off heavily overseas as fallout from COVID’s impact on higher vacancies, low occupancy, and higher incentives continues, and the trend is expected to land down under.
Valued at over $100 million, 1 Margaret Street, also known as Dexus Place, is an 18-level prime-grade tower near Barangaroo with 99% occupancy, but a low weighted average lease expiry of 2.1 years. It returns $20.4 million in net passing income.
Occupants in the 26-level 44 Market Street in the south end of town include Australian Bureau of Statistics. The tower is 85.4% full and the WALE is also low, at 2.7 years, while it returns net passing income of $24.3 million.
The market is also set to be tested by Blackstone’s offering of the JPMorgan tower at 85 Castlereagh Street, which had a June book value of $835 million, while Mirvac has offered 60 Margaret Street.
Barrenjoey analysts have warned office tower prices could come off by 15% to 20%. Colliers is expecting capital values to drop by an average of 10% from peak-to-trough, before the market recovers in 2024, a much less turbulent trajectory than the GFC which saw some assets suffer 25% in devaluations.
