Big hits to office valuations are coming, but not be as much as many expect

“Management teams have been found wanting recently, where they have continued to buy assets at historically low cap rates/high valuations rather than take profits and hand capital back,” Montgomerie said.

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“Now those decisions will come home [to roost] with higher gearing levels, higher cost of debt and falling distribution returns, so I expect dilutive refinancing capital raises to repay debt will become more common.”

Property giant Charter Hall is the latest A-REIT to reveal a hit to the value of its diversified portfolio, but analysts say the slide is not as bad as the big cuts forecast for the overall sector.

The ASX-listed developer, landlord and funds manager issued a market update on Thursday, where it said 98 per cent of its properties had been independently valued, providing a net decline of $1.9 billion.

The revaluations saw a drop in value for the $30 billion office portfolio of 3.7 per cent, while funds under management in property is expected to be about $72 billion – in line with the company’s projection.

Charter Hall said it remains committed to the office sector and development projects, by lodging plans with the City of Sydney for its $1.7 billion tower at Chifley Place. Known as Chifley South, it will be a premium 50,000 square metre tower adjoining the existing building, with plans to also upgrade the precinct.

Carmel Hourigan, Charter Hall’s office chief executive, said the group is confident that Chifley South would deliver on its leasing potential, with limited competition from new buildings planned in the Sydney CBD between 2024 and 2027.

“We continue to see a growing appetite for new, premium office buildings … and Chifley South will be well-positioned to absorb that demand,” Hourigan said.

JP Morgan’s analyst Richard Jones expects developments to play a pivotal role in Charter Hall’s funds under management growth in the short term, given that rising capitalisation rates – a measure of yield – would likely remain a significant headwind.

In a note to clients, he said the company’s management was questioned on whether equity investors still had appetite to continue deploying capital into future developments. “The response was a categorical ‘yes’, with investors keen to access the enhanced rate of returns,” Jones said.

Lou Pirenc, head of property and REITs at Jarden Australia, said commercial property valuations are coming down, but “arguably not yet as much as we would expect, given marginal cost of capital and emerging transactions”.

“However, we estimate that [A-REIT] units are pricing in what we consider an unrealistic scenario of a 25 per cent drop in asset values and funds under management,” Pirenc said.

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