Dexus says office markets will be back as interest rates bite

The group, which is delivering a $1.8bn timber tower for software giant Atlassian, is optimistic that the building costs will stop rising over the next 12-18 months.

Office and funds giant Dexus remains upbeat about office markets, declaring that its premium developments will thrive in the wake of the pandemic.

The company, which is delivering a $1.8bn timber tower for software giant Atlassian in Sydney, is optimistic that the building costs will also stop rising over the next 12-18 months.

But office landlords should also benefit from the speculative developments planned during the era of easy money not going ahead.

Dexus chief executive Darren Steinberg said the company had demonstrated resilience by growing or holding distributions through the Covid-19 pandemic and selling assets to help back its development pipeline and grow its funds business.

But the trust has forecast a distribution of 50-51.5c a security this financial year, a drop on last year’s 53.2c a security, as it deals with the tougher environment.

“We anticipate a challenging period over the next two years with rising interest rates, ongoing supply chain disruptions, a global energy crisis and geopolitical risks contributing to continued economic uncertainty,” Mr Steinberg said, warning that higher interest rates were expected to impact the group this financial year.

Dexus, which is delivering a $1.8bn timber tower for software giant Atlassian in Sydney, is optimistic that the building costs will also stop rising over the next 12-18 months.

Dexus remains bullish about the prospects of the Collimate Capital funds platform which it bought from AMP, despite losing the management of a $7.7bn office fund to Mirvac after an investor vote.

The Collimate platform has $21.1bn of funds remaining and rivals are targeting its shopping centre and infrastructure trusts, although in the latter area Dexus has raised funds and it is aiming to become a top real assets manager.

“We remain focused on completing the transaction which … will transform our product offering to investors, with new capabilities and significant scale across retail and infrastructure real assets,” Mr Steinberg said.

“Looking beyond fiscal 2023, we are set to emerge as one of the leading real asset managers in the Asia-Pacific region positioned to capitalise on underlying structural trends, and we are confident of continuing deliver long-term value,” he said.

Dexus booked a near 42 per cent jump in net profit to $1.62bn, assisted by higher property valuations. Once these were stripped out, the company generated a 2.7 per cent lift in both adjusted Funds From Operations and distributions of 53.2c a security.

The company also won $1.6bn of investment onto its funds management platform and it is providing liquidity to investors in its Dexus Wholesale Property Fund by selling assets.

Dexus said it had executed a deal with Atlassian to fund, develop and invest in the software company’s new Australian headquarters in Sydney. Non-binding heads of agreement were also reached to sell 35 per cent of the project.

Mr Steinberg said the company had selectively recycled assets and made investments to support long term growth which involved over $10bn of industrial, office, retail and healthcare deals.

UBS analysts said the result was a slight beat to expectations but the guidance was soft compared to market consensus. They said the mid point of the guidance range was 5 per cent below what was expected last year due to the impact of higher interest rates and asset sales.

They noted incentives have stabilised from the first half at about 30 per cent and occupancy has ticked up to 95.6 per cent but leasing done in the last quarter was very soft.

Dexus securities were down 0.5 per cent to $9.12 on the ASX just before lunchtime on Wednesday.