Dexus sees end to office woes despite tough half

The office landlord and property funds company says that big investors are readying to come in to the market as interest rates stabilise.

Office landlord and property funds group Dexus believes that activity in commercial property markets will bounce back later this year as interest rates stabilise, and big institutions again look to invest in the sector.

In the final result to be delivered by outgoing chief executive Darren Steinberg, the group said its portfolio was performing well, but it was still hit with property writedowns which drove it to a first half loss of $597.2m.

The property veteran was cautious on the economic environment but believes that the office cycle is bottoming out after a tough period.

“Markets remain challenging as capital flows and sentiment continue to be impacted by inflation, interest rates and geopolitical risks,” Mr Steinberg said. But he said that more offshore investors were preparing to invest locally and this would create a bigger market to sell buildings into at the appropriate time.

“I think they’re still waiting for the next round of valuations,” Mr Steinberg said. “I anticipate by about the middle of the year, as interest rates have truly stabilised, valuations have reset, that you’ll see a far more active market as we move into the third quarter of the 2024 calendar year.”

Mr Steinberg said Dexus had a strong balance sheet and, with the AMP Capital platform it bought last year being integrated this year, the funds unit was “set up to grow as we revert to a normalised rates regime”. He said this financial year was a transition period and the platform was well positioned as conditions improved.

Dexus is pressing ahead with major developments, including the new Atlassian headquarters in Sydney and Waterfront Place in Brisbane, and remains optimistic about the future of prime offices.

The company is pressing ahead with major developments, including the new Atlassian headquarters in Sydney and Waterfront Place in Brisbane, and remains optimistic about the future of prime offices.

“As economic conditions start to improve — because it does look like Australia’s going to have a soft landing — we should see that leasing markets pick up because there’s also going to be limited new supply coming into the market,” he said.

Dexus is also banking on being able to grow its funds empire as it makes a push into infrastructure via its acquisition of the AMP Capital business, even as it is dealing with hefty redemptions in some areas.

The first half result was a reversal from a $23.1m profit at the same time last year, but the company said that underlying earnings are rising. Underlying Funds From Operations grew by 4.5 per cent to $355.8m, supported by the growth in management operations and higher income from its investment holdings.

Dexus has kept its gearing in check and said it had settled $1.3bn in asset sales, and it has more offices up for sale, though some assets it offered did not trade last year.

Mr Steinberg called out the acquisition of the AMP platform as creating a $57.1bn scalable real asset platform. “The acquisition of the AMP Capital business has grown and diversified our platform, setting up the funds management business for future growth,” Mr Steinberg said.

Dexus was hit by capitalisation rate softening that has ripped through the property industry and had writedowns of $687.3m, with a 4.7 per cent decrease on prior book values for the half.

Dexus has a $16.8bn development pipeline, about half of which is on its balance sheet, but will only spend about $800m over the next 18 months.

Dexus expects distributions of about 48c per security with adjusted Funds From Operations to be in line with last financial year. The company’s securities dropped by 13c to $7.81.

Jarden analyst Lou Pirenc said the first half result was slightly better than expectations, helped by higher logistics and lower interest expenses, but with fiscal 2024 guidance unchanged, “this suggests to us a skew towards the first half more than better underlying trends”.

“Office fundamentals are holding up better than we feared, but we remain cautious on the outlook and the significant development commitments. Logistics remains strong, although the big increase in incentives is something to watch. Gearing is under control but should rise with the development pipeline over the next 18 months,” he said.

Citi analyst Howard Penny said investors would receive Dexus beating first half consensus expectations positively but noted that full year guidance remains in line with the share price discount to net tangible asset now close to 21 per cent.

“We still expect some further cap rate movement in the June 2024 results, but the large movement is closer to the peak cap rates in the cycle,” he said.

Originally published as Dexus sees end to office woes despite tough half