Property companies hold the valuation line as sales dry up

Commercial property owners are holding the line against falling valuations with Charter Hall and Dexus both expecting the best assets to continue to perform amid gloomy expectations.

Dexus chief executive Darren Steinberg: ‘We expect a continued trend of well-located quality assets performing better than secondary assets against an uncertain macroeconomic backdrop.’ Picture: James Croucher

The country’s largest commercial property owners are holding the line against falling valuations with Charter Hall and Dexus both expecting the best assets to hold up amid gloomy sector expectations.

After years in which big malls suffered calamitous drops in value, industry players are concerned that city and suburban office blocks will drop while the heat is also coming out of the once indomitable logistics market.

On the ground, the commercial market has all but stalled as interest rates jump, and there have been few sales to show where the value of properties lies, despite many campaigns drawing offers below expectations and assets being withdrawn.

The relative strength of the latest valuations also shows that listed real estate investment trusts could also throw up opportunities, as they are trading at far deeper discounts than seen in the direct market.

Dexus externally valued 34 office assets and 143 industrial parks, with draft external independent valuations resulting in a total estimated decrease of about $322m, or 1.9 per cent on the previous book values. The offices were off by about 2.3 per cent on the back of higher capitalisation rates and discount rates, with the fall partly offset by market rental growth.

Industrial holdings slipped by 0.5 per cent, with strong rental growth largely offsetting the impact of higher capitalisation rates and discount rates.

“We expect a continued trend of well-located quality assets performing better than secondary assets against an uncertain macroeconomic backdrop,” Dexus chief executive Darren Steinberg said.

Charter Hall last week had a net valuation uplift of about $210m across its empire, taking its real estate funds to about $73bn. David Harrison, chief executive of the property funds house, expects that the quality of the best assets will show through even as the cycle turns. “Valuation movements will reflect the difference between high quality long leased assets with rental growth and higher risk assets lower quality short weighted average lease expiry assets,” he said.

Charter Hall chief executive David Harrison. Picture: Chris Pavlich

Charter Hall’s industrial and logistics assets bumped up to 1.1 per cent while offices slipped by 0.5 per cent. But other areas were steadier, with long-leased retail assets lifting by 2.7 per cent and traditional shopping centres flat with a 0.1 per cent rise, and social infrastructure assets like childcare bumping up by 0.7 per cent.

Macquarie equities analyst Stuart McLean said that despite the increase in valuations across Charter Hall’s platform, “we remain cautious on the outlook for asset values given rising bond yields and discount rates”.

He warned of downside risks over the next 12 to 18 months as transaction volumes recover. “We currently factor for ~15 per cent devaluations across the Charter Hall platform by June 2024, albeit the December 2022 updates are evidence that rent growth, via market rents or CPI-linked escalators, is providing a solid offset at this point,” he said.

“The updates show limited impact from the more challenging macroeconomic environment, though we continue to see downside risk longer-term.”

JPMorgan analyst Richard Jones said Charter Hall’s valuations were a much better outcome than expected.

“Valuations appear to have held up based on transactional evidence being broadly in line with book values. However, we believe required returns have lifted and will result in devaluations in 2023,” he said.

Mr Jones added that – due to the delayed impact from devaluations – JPMorgan had lifted its earnings forecast and believes an upgrade to guidance is likely at Charter Hall’s February result.

Sameer Chopra, head of research at realtor CBRE Pacific, pointed to growth in rents as a potential driver of values.

“Vacancy tightened across all asset classes though 2022, which in turn helped power higher rent growth,” Mr Chopra said. “In office, we upgraded rents by 4 per cent to 8 per cent and industrial by up to 35 per cent through the course of 2022.”

He warned some of the development projects flagged by both listed and private developers may not happen in the tougher environment. This could hit the earnings of some companies but existing office blocks may benefit.

“I am concerned about whether the mooted new supply will manifest. Financing challenges and rising requirements for precommitments, which in many cases are 40 per cent to 60 per cent, are likely to push out projects by 12-24 months. So vacancy should tighten even further and rents could again provide an upside surprise,” Mr Chopra said.

He also predicted that the best properties would hold up.

“The other big theme we see is a bifurcated market with strong demand for premium and value, across office, residential and retail. It’s the middle ground where assets continue to have higher vacancy,” he said.