Dexus is bracing for subdued tenant demand in the office sector by recycling assets and investing in health and logistics.
In its annual results, Australia's largest office landlord said that leasing enquiry levels have fallen and inspection rates have slowed.
“Lead indicators point to a period of uncertainty in the Australian office market, with demand across the major CBD markets likely to be patchy in the short term,” Dexus executive general manager, office, Kevin George said.
Dexus’ net profit was down 23.3 per cent on the previous year with a net profit after tax at $983 million, primarily due to revaluations.
For the time being, the group’s office portfolio occupancy was high at 95.6 per cent, with rent collections across the group strong at 98 per cent.
Income growth for the sector was at 2.4 per cent down from 3.4 per cent, due to rent relief measures and a provision for expected credit losses.
Dexus completed new offices at 240 St Georges Terrace in Perth, which are 96 per cent committed; The Annex at 12 Creek Street in Brisbane (24 per cent committed) and the office and retail component of 80 Collins Street in Melbourne (94 per cent committed).
Dexus chief executive Darren Steinberg said although the long-term asset class had shown its resilience to perform through the cycle, they were looking at their options.
“With Australia in a recession, we are preparing for subdued tenant demand and increased vacancy levels in our core office markets.
“In this environment we remain focused on maintaining high portfolio occupancy. We will also make decisions that set the group up to perform over the long term,” Steinberg said.
“We will selectively recycle assets, which may result in short-term earnings dilution but will enable us to reinvest into opportunities that we believe will drive stronger investor returns over the next decade.”
The group has already made headway, investing in healthcare with the completion of the Calvary Adelaide Hospital; the acquisition of the North Shore Health Hub and the development of 12 Frederick Street, St Leonards near Sydney’s Royal North Shore Hospital.
Dexus also conditionally exchanged contracts to sell 45 Clarence Street, Sydney for $530 million at the end of June.
This month the group further progressed interests in the health and industrial sectors, securing QScan headquarters in Clayfield, Brisbane for $36.5 million and acquiring an $88.5 million (51 per cent) share in two industrial properties at Greenacre, NSW and Mickleham, Vic.
Steinberg said the group had to act quickly to keep moving forward during the Covid-19 crisis.
“We increased the group’s exposure to the industrial and healthcare property sectors alongside our third party capital partners, further diversifying our position across these growing sectors,” Steinberg said.
Dexus also has a $10.6 development pipeline with works continuing in industrial development projects including the $84 million Richlands project in Queensland and the $150 million South Granville project in NSW.