Analysis: Australian office landlords face price reckoning amid buyer impasse

Centuria Office REIT

19/07/2023 06:43

By Lewis Jackson
       SYDNEY, July 19 (Reuters) - Australia's largest
landlords have announced a string of  downgrades to the values
of their office block portfolios over the past month, but not by
enough to humour investors.
    While publicly traded commercial real estate markets have
plunged, the hit to unit prices has not shown up fully in asset
valuations, creating a stalemate between relatively upbeat
landlords and buyers waiting for deeper discounts.
    Office blocks are at the centre of the standoff. Emptied
during COVID, workers have been slow to return to offices, while
higher rates have hit property values just as debt gets more
expensive to service.
        Real estate investment trusts (REITs) such as Dexus
 DXS.AX , one of the country's largest office owners, Charter
Hall Group  CHC.AX , and Centuria Office REIT  COF.AX 
downgraded portfolios between 4% and 8% in bi-annual independent
valuations over June and July.
    Added to valuations from December, major REITs, which build,
own and operate property assets, have marked down office
portfolios by roughly a tenth or less over the past year.
Non-office assets have fallen even less.
    That's a fraction of the decline in public markets. Dexus
shares have fallen 28% since 2022, while Charter Hall has nearly
halved. The Australian REIT benchmark is still a fifth off
pre-COVID levels despite a 4% rise this year.
    While such divergence between public and private valuations
isn't uncommon due to prime property owners being unwilling to
mark holdings down, the yawning gap reflects broader uncertainty
about the sector.
    "Buyers aren't willing to pay the price from the last
valuations," said Winston Sammut, an investment manager at
Sequoia Financial Group and a former executive at Charter Hall.
"You can put a value on stuff but if no one's wiling to pay that
price, it's not a true value."
    REITs argue their portfolios are flush with premium
buildings and filled with tenants. In response to questions from
Reuters, Centuria said valuations for smaller offices are
holding up well and referenced its recent A$23 million sale of a
Canberra asset, which was only 1.7% below the December book
value. Dexus and Charter Hall did not respond to requests for
comment.
    Investors are divided about whether unlisted prices will
fall as far as public markets, but even optimists are wary.
Grant Berry, a REIT portfolio manager at SG Hiscock & Company,
calls a 30% drop in prices "heavy handed" but flagged the
possibility of 20% fall.
    Unlisted valuations are expected to settle at similar levels
to public market pricing, with discounts around the 20% to 30%,
according to investment bankers.
        One recent high-profile sale underscores the downside
risks. Dexus last month sold a premium downtown Sydney
skyscraper for A$393 million, a 17% discount to the December
valuation.
    Faced with the prospect of big discounts, owners are pulling
sales. U.S. private equity giant Blackstone and Chinese insurer
Ping An both paused high-profile Sydney office block sales this
year after lowball bids, local media reported. Blackstone
declined to comment and Ping An did not respond to a request for
comment.
    Valuers can justify keeping downgrades modest as long as
there are few big sales against which to benchmark prices,
according to Amy Pham, a REIT fund manager at Pengana Capital
Group.
    "Valuers aren't doing themselves any service by being
cautious. The more they hold back, the more buyers and investors
will hold back."
    
    BREAKING THE DEADLOCK
    Growing pressure on owners to pay investors scrambling out
of unlisted property funds may ultimately force them to sell
buildings to raise cash, effectively breaking the deadlock,
Sammut said.
    "Money is queuing up to get out before the valuations are
fully adjusted for the rate increases," he said. "As more
redemptions come through, it creates pressure for more sales."
    Charter Hall has already curbed how much investors can
withdraw from one of its largest unlisted office funds as it
struggles to find buyers at prices it believes are fair.
    In the United States, Blackstone has repeatedly limited
investor redemptions from its flagship real estate fund since
November.
    Australia's A$100 billion pension fund Hostplus abruptly
closed its standalone property and infrastructure funds in June,
citing costs, complexity and the need to manage the overall
asset mix and cash flow.
    "Hostplus, that's a start," said Pham. "We're looking to see
whether the fund managers, the Charter Halls, the Centurias, the
Dexus are also getting large redemptions."

($1 = 1.4628 Australian dollars)

 (Reporting by Lewis Jackson. Additional reporting by Scott
Murdoch. Editing by Sam Holmes.)
 ((lewis.jackson@thomsonreuters.com; Reuters Messaging:
@lewjackk))