Office values head lower amid reset

A lack of transactions for CBD office assets this year can be linked to a variety of factors, industry experts say.

Rising interest rates have created a level of uncertainty among buyers, as many sit on the sidelines and wait for the cost of debt to stabilise.

The changing economic conditions have also led potential buyers to question the value of office buildings, creating a mismatch between what sellers want for assets and what buyers are willing to pay.

Several CBD office properties have been withdrawn from sale, after bids have not aligned with sellers’ expectations.

Business News can reveal that the Alluvion building at 58 Mounts Bay Road, jointly owned by Dexus and Cape Bouvard Investments, is the latest in a line of Perth office assets unlikely to sell despite being on the market.

The expressions of interest period for the 20-storey building ran out in June, and there has been no word of a deal being made, industry sources confirmed.

Durack Centre on Adelaide Terrace, a 13-storey building owned by Stockland, was pulled from the market after being listed last June, the second time the developer offered it for sale in three years.

Property fund giant Centuria Capital Group withdrew four adjacent St Georges Terrace office buildings from the market in December last year, including the Channel 9 building.

Kuwaiti Government-owned St Martins Centre was under due diligence to sell to Melbourne-based Quintessential Equity earlier this year, but the deal fell through.

The latter deal was related to complexities associated with the site, rather than a low bid from the prospective buyer, according to industry sources.

Valuations

Recent portfolio valuations signal the gap between purchaser and vendor expectations is narrowing.

Charter Hall and Dexus’ recent valuation update reported a 3.7 per cent and 7.7 per cent decrease in book values for their office assets respectively. Business News’ Data & Insights lists Charter Hall as the fourth largest commercial property owner in Perth and Dexus as the second largest.

Centuria Capital Group’s recent valuation for its office real estate investment trust, which analysed 70 per cent of its portfolio, reported a $102 million decrease on previous book values.

For the institutional giant, which owns most of the commercial real estate in Perth, this equated to a 4.4 per cent fall in value.

Centuria Capital Group head of office Grant Nichols told Business News the results were better than anticipated, showing the resilience of the office market.

“There was a perception that you would see valuation deterioration [but] what has occurred is certainly less than what has been speculated,” he said.

“There is somewhat of a mismatch between where REITs are being priced at the moment and the valuations that have occurred, and also where some of the market or media speculation as to where valuations could head.

“I also think the impacts of work from home have probably been overstated, particularly in Perth and Brisbane, where we have seen positive net absorption or increasing tenant demand.”

JLL director real estate economics Ronak Bhimjiani said declines in capital values in Perth CBD office assets had occurred during periods of economic uncertainty.

During the 1990s recession, capital values for Perth CBD office assets dropped by 70 per cent; during the global financial crisis they reduced by 21 per cent; and since the onset of COVID-19, Perth’s office asset values have reduced by 9 per cent.

Mr Bhimjiani said that after these economic downturns, values for office assets rose sharply.

Noting the inverse relationship between yield and value, in that values decrease as yields increase, he said forecasts show that yields should plateau next year, in line with interest rates.

“The rate at which yields increase will probably start to flatline in early 2024 … we have [already] seen 1.25 years of yields increasing,” he said.

“If you add another six months to that, which gives you roughly two years, it starts to feel a bit [like] the GFC in Perth, which is when we saw yields increase over a two-year period.”

JLL senior director sales and investments Sean Flynn said without any major sales of office buildings so far in 2023 it was hard to pin down values.

More detailed reporting, including individual breakdowns of assets, from major institutions, is expected next month.