Charter Hall targets growth amid tougher real estate climate

The property deal machine is upbeat about its capacity to perform through a slowdown in commercial property.

Property funds house Charter Hall believes it can ride out the slowdown in office markets by ­focusing on premium properties in cities and bolstering its holdings in resilient sectors including warehouses, health and smaller shopping centres.

The company lifted its property empire to $73bn and is defying concerns that higher interest rates would hit its ability to do deals. While the pace has slowed, the David Harrison-led company is betting on finding new transactions to deploy pension capital as the property market resets.

Charter Hall was sold off on Monday, with the stock falling 6 per cent, or 88c, to $13.63 as investors had bet on an upgrade at the earnings announcement. The shares had lifted ahead of the ­result.

Mr Harrison defended the conservative stance, saying property deals were still challenging.

“We don’t really take this as an environment to be aggressive with guidance. We prefer to print the results and talk about them when they’re realised,” he said.

Mr Harrison remains bullish about the future, saying that tenants were still demanding premium properties to attract staff back to offices and new warehouses remained in hot demand.

Mr Harrison said that after nine RBA interest rate rises, some investors were cautious, but he was bullish about the opportunities in the market.

“Despite cap rates softening, people are still very keen on logistics – which has got virtually zero vacancy across the sector – and we’re not as negative as others on some parts of the office market,” he said.

He said he believed that once the market settled more, funds would flow to the sector. “When interest rates peak and bond yields peak, more equity will flow into real assets,” he said.

Corporate transactions could even come back. “There might be some M&A activity in the listed market this calendar year. It’s probably going to be in the smaller mid-cap sector, rather than the large cap,” Mr Harrison said.

Charter Hall turned in interim operating earnings of $239.9m, showing operating earnings per security post-tax of 50.7c and a net profit of $226.5m. It will pay distributions of 20.8c per security.

The company pointed to its ability to keep operating, as it allotted $2.1bn of equity across its property funds and conducted $7.9bn worth of transactions.

Mr Harrison is bullish about the diversified nature of the company’s investments. “We’ve always been prepared to look at new sectors or sectors that we don’t think are priced correctly.”

He said the focus remained on sustainable and resilient portfolios that deliver earnings growth for investors through all market conditions. The company’s funds have forged heavily into warehouses, service stations, pubs, childcare and social assets in recent years. “This focus on performance for our investors and our co-investment alongside them continues to attract capital to the platform,” Mr Harrison said.

Charter Hall has also turned to development, including plans to add a tower to Sydney’s Chifley Square, as buying markets have slowed. The company finished more than $2bn worth of projects in 2022 and has the firepower to go after opportunities.

“We remain well-placed to continue growing the platform with $6.5bn in available liquidity, significant opportunities in our sale and leaseback pipeline, our $15.4bn development pipeline, as well as a number of new product initiatives,” Mr Harrison said.

Despite falling values across much of the market, Charter Hall’s investment portfolio rose by $126m to $3bn, partly on the back of the strength of its government tenants.

The group’s overall funds increased by $8.1bn to $88bn, consisting of $73bn of property and $15bn of equity funds run by Paradice Investment Management.

The big money is still chasing real estate with superannuation funds backing the company’s pooled funds with $547m invested. The large-scale partnerships attracted $1.2bn.

Charter Hall has built its development pipeline up to $15.4bn and is using its model of being a landlord across most sectors to do more deals with large tenants for new facilities. “We’re spending a lot of time building new office buildings and industrial,” Mr Harrison said. “This bifurcation of tenant demand is playing out in demand for modern buildings, particularly in office.”

While the conditions are against development, the company said activity was mainly in its funds and most projects were pre-leased and had fixed price building contracts.

Charter Hall confirmed its full-year earnings guidance of post-tax operating earnings per security of no less than 90c per security. The distribution per security guidance is for 6 per cent growth over last year.

UBS analyst Grant McCasker said the result hit expectations, but its composition was weaker, and cautioned about the company’s ability to grow.

“With increased gearing in funds, Charter Hall’s ability to grow to meet market expectations of assets under management growth is likely to disappoint. Growth is reliant on wholesale partnerships,” he said.

Citi analyst Suraj Nebhani said the earnings guidance implied a decline in this half, but the company could beat it. “Charter Hall is typically conservative with earnings guidance and potentially has more reason to be conservative now given the uncertainty around cap rates and asset values. We therefore see upside to guidance,” he said.