Australia's largest landlords have recently downgraded the values of their office block portfolios, but investors are seeking deeper discounts amid a significant gap between public and private valuations.
While publicly traded commercial real estate markets have experienced a sharp decline, the impact on unit prices has not been fully reflected in asset valuations. This has led to a stalemate between optimistic landlords and cautious buyers waiting for greater price reductions.
Office blocks have become a focal point of the standoff. With many offices still empty due to the lingering effects of the COVID-19 pandemic, workers have been slow to return, and higher interest rates have further weighed on property values, making debt servicing more challenging.
REITs such as Dexus (ASX:DXS), Charter Hall Group (ASX:CHC), and Centuria Office REIT (ASX:COF) have recently downgraded their portfolios by 4% to 8% during bi-annual independent valuations conducted in June and July.
Although these downgrades have added to the valuations from December, major REITs, which specialise in building, owning, and operating property assets, have only marked down their office portfolios by approximately a tenth or less over the past year. Non-office assets have experienced even smaller declines.
This disparity between public and private valuations is not uncommon, as prime property owners are often reluctant to reduce the value of their holdings. However, the significant gap reflects broader uncertainty in the sector.
According to Winston Sammut, an investment manager at Sequoia Financial Group and a former executive at Charter Hall, "Buyers aren't willing to pay the price from the last valuations. You can put a value on stuff, but if no one is willing to pay that price, it's not a true value."
REITs argue that their portfolios consist of premium buildings with high occupancy rates. Centuria, in response to questions from Reuters, highlighted the resilience of valuations for smaller offices and referenced a 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 provide comments in response to requests for comment.
Investors remain divided on whether unlisted prices will fall as much as those in public markets, but even the optimists are cautious. Grant Berry, a REIT portfolio manager at SG Hiscock & Company, believes a 30% drop in prices would be "heavy-handed," but he acknowledges the possibility of a 20% decline.
Investment bankers expect unlisted valuations to settle at levels similar to public market pricing, with discounts ranging from 20% to 30%.
A recent notable sale highlights the downside risks. Dexus sold a premium downtown Sydney skyscraper last month for A$393 million, representing a 17% discount from the December valuation.
Facing the prospect of significant discounts, owners have been withdrawing sales. U.S. private equity giant Blackstone and Chinese insurer Ping An reportedly paused high-profile Sydney office block sales this year due to lowball bids. Blackstone declined to comment, while Ping An did not respond to requests for comment.
Valuers have been cautious in their downgrades, as long as there are few major sales to serve as benchmarks for prices. Amy Pham, a REIT fund manager at Pengana Capital Group, suggests that "valuers aren't doing themselves any service by being cautious. The more they hold back, the more buyers and investors will hold back."
As pressure mounts on owners to meet the demands of investors looking to exit unlisted property funds, they may ultimately be forced to sell buildings to raise cash. This could potentially break the deadlock in the market, as Winston Sammut explains, "Money is queuing up to get out before the valuations are fully adjusted for the rate increases. As more redemptions come through, it creates pressure for more sales."
Charter Hall has already restricted investor withdrawals from one of its largest unlisted office funds as it struggles to find buyers at what it deems to be fair prices.
Similar situations have occurred in the United States, where 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.
According to Amy Pham, "We're looking to see whether the fund managers, such as Charter Hall, Centuria, and Dexus, are also facing large redemptions."
