Dexus in the investor spotlight as buyout scrutiny turns to real estate

Market analysts believe the real estate sector is becoming ripe for buyouts.

Dexus Property Group could come under close watch from private equity or super fund investors when it delivers its half-year results this week at a time market analysts believe the real estate sector is becoming ripe for buyouts.

There is a gulf between the prices of privately held property companies and those in the Australian listed market, where equities investors are grossly undervaluing real estate investment stocks based on their net tangible asset value.

Some REITs such as Mirvac Group have not staged a prolonged uplift in share price performance for shareholders over the long term – its share price is $2.27 compared to $3.86 in 2003. The same is the case for Stockland, with the country’s largest residential developer trading at $3.90 per share after shares were $4.62 at the start of 2003.

Some believe Dexus is particularly vulnerable to a buyout, not because of its poor performance, but that the opportunities to gain such a quality office portfolio in Australia are rare.

Blackstone has looked at Dexus before, but would probably find better discounts in the office sector elsewhere in the world, yet Brookfield may be a buyer.

Dexus chief executive Darren Steinberg has been at the helm for about 12 years, and some believe his departure is likely to be sooner rather than later, with a recent changing of the guard in the real estate sector across the board, so the timing could be right from that perspective.

The market is undervaluing the stock because office landlords are out of favour with the slow return to the office by workers after Covid-19 and as the country enters softer economic conditions. Although office is on the nose, that is where the opportunity is.

Then there is GPT Group – a logical and obvious candidate for a buyer looking for a top-quality portfolio, and the company is said to have been on the radar of prospective buyers in the past couple of years.

The discount to net tangible assets for REITs in some cases is as high as 30 per cent.

Part of the problem is that the market holds no faith in the statement that listed REITs would not be revalued lower in the future, so once that happens, the discount will likely be lower.

Another reason for a buyer in the current market for a US private equity firm like Brookfield or Blackstone to swoop on a big portfolio here right now is that the Australian dollar is currently about 69c to the US dollar.

Market observers estimate this could mean it could make the portfolio about 10 per cent cheaper on the currency alone, and when a portfolio is geared up with debt, the upside for the buyer could be a return of 40 to 50 per cent at least.

The share prices could fall further as it remains a challenging time for REITs looking to embark on development.

As the economy slows, demand for new buildings is unlikely to be there and debt is becoming increasingly expensive.

More groups are expected to issue convertible bonds to boost funding after Dexus did last year.

In the coming months, it may well be just the right time for a buyer with deep pockets to strike.