Financial Review - Aug 17 2016 at 10:43 AM - Updated Aug 17 2016 at 5:03 PM
DEXUS Property Group makes big
gains on value but income growth soft
Dexus chief executive Darren Steinberg expects office tower values to keep rising.
by Matthew Cranston
Office property giant DEXUS Property Group is planning new unlisted property funds
as it feeds an increased demand for commercial property investment which has
helped push the group's office tower values up 9 per cent in the last year.
The group recorded a $1.2 billion net profit despite subdued income growth and a
slight increase in incentives.
The ongoing demand for property assets in Australia resulted in an increase of up to
25 per cent in the value of assets such as 480 Queen Street in Brisbane and a 16
per cent increase in the value of landmark Sydney office tower 1 Farrer Place.
DEXUS chief executive Darren Steinberg said office tower values would continue to
rise.
"The downward shift in global interest rates together with strong underlying investor
demand for quality Australian real estate will continue to underpin future asset
valuations," he said.
The group's third-party funds under management grew to $11.2 billion, up 17 per
cent over the year to June driven by acquisitions, developments, revaluations and
new investors.
And Mr Steinberg says discussions are underway with clients for new funds that will
buy assets out of the group's $4.6 billion development pipeline.
"We look forward to bringing some new funds to market as a result of opportunities in
development."
Cautious approach
Mr Steinberg was cautious about the outlook, however, saying he was happy to see
the group further reduce gearing "in case things don't go to plan". June 30 gearing is
30 per cent but by the end of the year likely to be around 27 per cent.
Whilst valuations increased, income growth was tepid.
In office, like-for-like income growth of only 1 per cent was achieved, whilst in the
group's industrial portfolio like-for-like income dropped 7 per cent.
Executive general manager for Office & Industrial Kevin George said average
incentives in the office market were up marginally, but A-grade incentives had
reduced "materially".
He said the like-for-like income growth result was expected to improve
further and the impact of Barangaroo in Sydney was largely negated because of
pricing differential. There had also been a record number of leasing deals and that
DEXUS had secured a new tenant for 30 The Bond, which Lendlease was vacating.
Mr Steinberg said there was room for improvement on the industrial side.
"It was a disappointing result for us," he said. "We can't hide from that."
The industrial tenant retention rate fell from 50 per cent to 32 per cent, largely due to
a few large clients receiving competitive deals to relocate, which DEXUS decided not
to match.
Numbers 'heading north'
Mr George said the industrial income numbers were on the mend.
"We are well progressed on industrial. I am confident that the like-for-like number is
heading north."
The management team emphasised that DEXUS portfolio was concentrated in
Sydney, where there was the best chance for improvement.
Guidance for fiscal 2017 was supplied with between 2.5 per cent and 3.5 per cent
growth in distribution per security and 3 to 3.5 per cent growth in underlying funds
from operations per security.
Analysts UBS said DEXUS guidance was "a tad soft".
Overall the group's distributions per security for fiscal 2016 were 43.51 cents per
security, up 6 per cent on the prior year.
Net tangible assets per security rose 85 c to $7.53 up 12.7 per cent largely due to
the large revaluations. UBS has a price target of $8.64 on the stock.
DEXUS office portfolio's capitalisation rate tightened 55 basis points to 6.16 per cent
while the industrial portfolio tightened 39 basis points to 7.38 per cent.