GPT Group records $1.1m loss for the first half of 2023 after office tower writedowns

Diversified property trust GPT has warned of the potential for further softening of asset values after recording a small loss for the first half of 2023.

GPT Group chief executive Bob Johnston aid the group’s office portfolio remained ‘challenging’ while retail and logistics performed strongly in the half year.

Diversified property trust GPT has warned of the potential for further softening of asset values after recording a small loss for the first half of 2023 due to the RBA’s sharp interest rate rises.

The group announced a first-half net loss of $1.1m, underpinned by negative investment property valuation movements of $341.3m, mainly within its prime office portfolio. In the first six months of 2022, GPT recorded a $529.7m profit after tax.

GPT transaction activity has been limited over the past 12 months and it is expected that investment appetite, particularly for larger assets, will remain relatively muted for the balance of 2023. It said there was potential for further softening of valuation metrics and asset values as transaction evidence emerged.

One One One Eagle Street in Brisbane, which is owned by the GPT Group and the GPT Wholesale Office Fund.

Chief executive Bob Johnston, who has pencilled in his retirement by the end of the year, said the group’s office portfolio remained “challenging” while retail and logistics performed strongly in the half year, increasing 13.7 per cent and 7.4 per cent respectively.

The office segment contribution fell by 3.4 per cent as a consequence of higher vacancy in the portfolio compared to the prior corresponding period.

“We’ve seen interest rates rise sharply over the last 12 months and as a result of that we’ve seen the valuation metrics in general soften and that’s led to valuation decline,” Mr Johnston said.

“It was more pronounced in offices where there was the same amount of cap rate softening but you didn’t see rental growth offset. That’s what’s driven it.

“Clearly there’s not been a lot of transaction evidence in any of the sectors in the first half. So investors are sitting on the sidelines waiting for a bit of price discovery and bond yields to settle so they can then adjust their return expectations to see where prices fit.”

GPT has about a third of its assets tied up in office towers, with its Sydney towers recording writedowns of almost $242m.

The biggest writedowns across Sydney’s CBD included 2 Park St (-$47.2m), Darling Park (-$40.7m) and Australia Square (-$39.2m), while offices in Parramatta, in Sydney’s west, were also written down, including 60 Station St (-$28.4m) and 32 Smith St (-$28.2m).

This was partly offset by a valuation lift at One One One Eagle St of $20.8m and Melbourne’s 181 William & 550 Bourke streets gaining $6.2m.

The increased cost of debt from the RBA’s interest rate rises had a material impact on the group’s funds from operations (FFO), which was $316.7m, down 3 per cent on the prior period of $326.5m.

GPT said it had gearing of 28.1 per cent, liquidity of $1.5bn, weighted average debt term of 6.1 years and a 4.1 per cent cost of debt for the period. It announced an interim distribution of 12.5c per security.

Moody’s Investors Service vice-president Saranga Ranasinghe said GPT’s results were credit negative. “We expect GPT’s office segment to continue to face headwinds over the next 12-18 months,” she said.

“When compared with other rated REITs with office exposures, GPT’s has a higher exposure to Paramatta and Melbourne, which are weaker than the Sydney office market.”

GPT shares rose 1c to $4.21.