Not so bad I would say. I topped up at below 70c today.
The negative market sentiment is an opportunity as a too large discount is currently priced in.
Chanticleer column today.
Why bad news could be good news for office property
The reckoning for office property appears to be coming, with valuations potentially set to fall more than 20 per cent. But a worse outcome is priced into some REITs.
On the surface, it looks like another tough week for Australia’s office property sector.
First, the sale of an A-grade Sydney office building by Dexus last Friday at a 17.2 per cent discount to book value raised legitimate concerns that the sector is set to be hit by a wave of asset revaluations.
Then, the announcement that Hostplus will shut a standalone property and infrastructure fund was taken by some commentators as a harbinger of doom for the commercial property sector specifically, and unlisted assets more broadly.
Finally, a lawyer warned commercial property valuers and auditors would face a wave of damages litigation if they backed unrealistic valuations.
But despite all the gloom, it’s worth noting that the analysts who closely watch listed office property landlords have taken a different view of recent events.
For them, this week’s news might be better – or at least, less worse – than it first appears.
Citi analyst Howard Penny and Macquarie’s David Pobucky see the sale of 44 Market Street in the Sydney CBD by Dexus for $393.1 million as an important signpost for the broader office sector, given it is the first major transaction to occur since interest rates started rising last May.
“In our view, the transaction provides a material piece of evidence for direct market office values,” Pobucky says.
The discount is big, whichever way you cut it. It’s a 17.2 per cent discount to Dexus’ December book value, a 22 per cent discount to book value in June 2022, and 23.1 per cent below Citi’s estimated theoretical geared value.
But as Penny points out, Dexus stock is trading at a 31 per cent discount to the value of its net tangible assets as at December 31.
In other words, the Market Street discount could be viewed as a better outcome than the market has priced into Dexus shares.
Pobucky describes the sale as “a positive piece of evidence” for a “stock screening as value”. He notes 44 Market Street isn’t exactly a paragon of office market virtue, given it was built in 1978, had relatively lower occupancy (85 per cent), and a weighted average leasing expiry of 2.9 years.
“The Dexus share price is implying an approximately 20 per cent decline in asset values [post-corporate costs]. Therefore, with the DXS portfolio being higher quality and with active earnings, we believe the transaction suggests relative value for Dexus,” he says.
One sale does not make a summer, of course. Investors, landlords and property valuers will want to see more evidence of where office valuations are heading.
The fact Dexus stock has slid another 3 per cent this week shows the less-worse-than-expected message of Citi and Macquarie isn’t top of mind, and sentiment remains poor. And if this Market Street deal does represent something of a bottom for the market, the prospect that office property values will need to be written down by more than 20 per cent in a year will have ramifications across the sector.
This is the reckoning that some parts of the commercial property sector were hoping – some would say pretending – wouldn’t arrive.
But it’s worth remembering that listed real estate investment trusts in Australia and across the world are priced for pain. Investors should stay very cautious on this sector, but it will be fascinating to watch if that pain is as great as first thought.
TOT Price at posting:
69.5¢ Sentiment: Hold Disclosure: Held
(20min delay)