With valuation declines in office assets having intensified, due to failing demand and changing workplace needs, it’s hardly surprising that the ASX-listed $8bn property giant, Dexus, has worked hard to unshackle itself from its persona as the country’s largest office landlord.
In short, the funk experienced by the office sector since covid, goes a long way to explaining why the Dexus share price has been trading at a 30% discount to its NTA for longer than it cares to admit.
Following a strategy of portfolio diversification into new sectors like healthcare property, warehousing, renewable energy assets and funds management, 173 of the company’s 1761 assets, now comprise 33 office properties while industrial properties account for another 140 .
Independent valuations
In light of this rebalancing, it’s interesting to note what happened when these properties were externally valued as at 31 December 2023.
The draft external independent valuations have resulted in a total estimated decrease of circa $762.4m or 5.2% on prior book values for the six months to 31 December 2023.
Driven by higher capitalisation rates and discount rates, outgoing CEO Darren Steinberg, who vacates the top job next March, notes the circa 6% decrease in the value of the office (on previous book values) as partially offset by market rental growth.
By comparison, the industrial portfolio decreased circa 2.1% on prior book values, with strong rental growth again largely offsetting the impact of higher capitalisation rates and discount rates.
“We expect well-located quality assets to continue to outperform non-core locations and secondary assets,” said Steinberg.
WACR
Meantime, the weighted average capitalisation rate (WACR) – a metric used to measure the return on investment of real estate assets – across the total portfolio expanded by circa 34 basis points over the past six months from 5.11% at 30 June 2023 to 5.45% at 31 December 2023.
The WACR of the office portfolio expanded by circa 32 basis points from 5.21% at 30 June 2023 to 5.53% at 31 December 2023.
The industrial portfolio WACR expanded by circa 42 basis points from 4.76% at 30 June 2023 to 5.18% at 31 December 2023.
Commercial has further to unravel
The company’s valuation update follows a recent admission by Steinberg that the commercial property sector – which still accounts for 70% of its investment portfolio – is still stuck in a period of transition due to both uncertain business conditions and the impact of higher interest rates.
“Dexus is at an exciting stage in its evolution, with strong foundations and a unique set of capabilities in the platforms,” said Steinberg.
Meantime, the company is expected to continue rebalancing its portfolio after acquiring the $4bn Commonwealth Property Office Fund almost 10 years ago.
Efforts to rebalance its portfolio have included the acquisition of Perth’s Jandakot Airport (and industrial estate) in 2021, and last year’s buy-out of a major holding in AMP Capital’s $28bn platform comprising commercial property, local infrastructure and renewable energy assets.
Details relating to individual property valuations will be available in Dexus’s HY24 results which will be released to the Australian Securities Exchange on Wednesday, 14 February 2024.
