Commercial property pain spreads with office towers under pressure

The downturn in commercial property has extended further across the listed market with office landlord and funds group Dexus announcing around $1bn worth of writedowns.

The pain of the downturn in commercial property has extended further across the listed market with office landlord and funds group Dexus announcing around $1bn worth of writedowns.

Dexus is one of the country’s largest owners of office towers but has diversified away from the sector by pushing into new areas including healthcare, funds management and other alternative sectors.

It is just the latest company to record heavy writedowns after independent valuations, with the pain falling most heavily on its office portfolio, although its industrial assets were also written down.

Just last week property funds house Charter Hall was slugged by a $1.9bn hit to its property valuations as the commercial real estate market comes under pressure with interest rates rising.

There have been very few large sales of office towers finalised this year and those that have gone through have often shown deep discounts. Most notably Dexus sold a Sydney CBD office tower for a 17 per cent discount.

Dexus announced that 175 of its 1821 assets, comprising 32 office properties and 143 industrial properties had been externally valued.

The draft external independent valuations have resulted in a total estimated decrease of about $1bn or 6 per cent on prior book values for the six months to the end of June.

Dexus chief executive Darren Steinberg noted the value of the office portfolio decreased about 7.7 per cent on prior book values driven by higher capitalisation rates and discount rates, partially offset by market rental growth.

Dexus chief executive Darren Steinberg. Picture: Britta Campion

The industrial portfolio decreased by about 0.2 per cent on prior book values, with strong rental growth largely offsetting the impact of higher capitalisation rates and discount rates.

“We expect well-located quality assets to continue to outperform secondary assets and locations against an uncertain macroeconomic backdrop,” he said.

The weighted average capitalisation rate across the total portfolio expanded by about 32 basis points over the past six months from 4.8 per cent at the end of December to 5.12 per cent at the end of June.

The weighted average capitalisation rate of the office portfolio expanded by circa 32 basis points from 4.89 per cent at December 2022 to 5.21 per cent at the end of June. The industrial portfolio weighted average capitalisation rate expanded by about 31 basis points from 4.46 per cent at the end of December to 4.77 per cent at the end of June.

Citi analysts Howard Penny, Suraj Nebhani and Akshit Batra said that although Dexus is not a forced seller given its relatively prudent gearing, they have been recycling capital into developments. The company also sold the Axxess Industrial Park in Melbourne to Gateway Capital.

Dexus has sold about $700m of assets, representing an average 8 per cent discount to the end December.

Dexus shares lifted by 11c to $8.21, as investors welcomed it being upfront in taking the hit.

“There is further downside risk from office leasing fundamentals, in our view. However, we view recent asset sales favourably given balance sheet benefit, as well as office pricing relative to what is implied in the Dexus share price,” Macquarie analysts said.

The Citi analysts said that gearing levels in the listed Australian sector balance sheets remain prudent and this could result in other transactions being delayed if an acceptable offer price were not established.

“We do expect cap rates to further increase into December, however, a key debate in the market now is what is priced into the share price discount to net tangible assets,” they said.

Listed office and industrial landlord Growthpoint Properties Australia upgraded its forecast funds from operations guidance but said its preliminary draft external valuations indicate a like-for-like decrease of $123.8m.

“The group’s movement in preliminary draft external valuations reflects the increased cost of capital across all markets. In the industrial portfolio, there continues to be strong market rental growth which is largely offset by yield expansion,” Growthpoint managing director Timothy Collyer said.

The national CBD office vacancy rate sits at around 14 per cent, with the first quarter 2023 seeing positive net absorption and a small increase in prime effective gross rents, according to real estate agency JLL.