Revaluations continue to drive sharp changes in profitability at real estate company Dexus (ASX: DXS), although this time it's in a positive direction.
After net profit plunged 25.9 per cent to $1.28 billion in FY19, the pendulum has swung back 36.9 per cent to hit $994.2 million for the first half alone in FY20.
Almost all of the Sydney-based company's office and industrial assets were externally valued at the end of the year, with valuation gains helping to push net tangible assets (NTA) per security up 5.9 per cent to $11.10.
DXS shares rose 0.74 per cent to $12.985 each at 10:40am AEDT.
"We continue to make significant progress towards our vision of being globally recognised as Australia's leading real estate company," says chief executive officer Darren Steinberg.
"Urbanisation continues to drive demand for quality space in Australian cities and the growth in pension capital is increasingly chasing the favourable returns that real estate can offer.
"We are responding by remaining focused on enhancing the attractiveness of our properties, while leveraging our market intel and capabilities to create spaces where our customers want to be, while at the same time partnering with like-minded third party capital to invest alongside in our core markets."
During the half the company also completed the 240 St Georges Terrace development in Perth and secured a $2.1 billion redevelopment for Brisbane's Eagle Street Pier, where construction is expected to start in 2022 with the first tower to be completed in 2026.
"We've made solid progress across our development pipeline and reached agreement to move forward with the development scheme for Eagle Street Pier and surrounds at the Waterfront Precinct after an extensive engagement process with Queensland Government and Brisbane City Council," says chief investment officer Ross Du Vernet.
"We have significant embedded value in our pipeline from the anticipated development margins and fees associated with key projects in the eastern core CBD markets of Sydney, Melbourne and Brisbane."
Construction has also started on Dexus' $84 million Richlands project in Queensland and the $142 million South Granville project in NSW, while the total development pipeline now stands at a cost of $11.2 billion of which $5.7 billion sits within the Dexus portfolio.
In terms of sales, Dexus has exchanged contracts to offload 100 per cent interest in Garema Court in Canberra $71.5 million, with the transaction due for completion later this month.
The group notes office and industrial occupancy rates remained high at 97.4 per cent and 96 per cent respectively.
"For the first six months of the financial year we have continued to benefit from office occupier and investor demand for quality properties in our core markets, achieving record Melbourne rents and strong asset valuation uplifts," says Steinberg.
"Our funds business has seen a significant increase in interest from offshore investors seeking to invest directly in quality office properties.
"These factors combined with recent transactional evidence and the lower for longer interest rate environment, reinforce our view that there will be further increases in asset values."
Dexus' executive manager, office, Kevin George, notes the company has been able to capture the upside in the Sydney CBD market with 18 per cent re-leasing spreads over the period.
"Up to the end of FY22, we have the opportunity to reset rental levels across 139,677 square metres of vacant or expiring space across our Sydney portfolio, which remains under-rented. This represents approximately 19 per cent of our total office income," says George.
"In Melbourne where prime office vacancy has tightened to a record low of 1.8 per cent, our leasing focus at 80 Collins Street has resulted in record rents and set new benchmarks for the Melbourne CBD with metrics exceeding our acquisition underwrite.
"Six new tenancies were secured across 15,418 square metres, increasing leased space at the South Tower from 63 per cent to 97 per cent, and leaving only one floor available to lease."
The Dexus office portfolio has continued to outperform its benchmark over the three- and five-year time periods. Average incentive levels ticked up as a greater proportion of leasing was undertaken in Brisbane and Perth, with face deals also representing a higher proportion of leasing.
The company's executive general manager for industrial, retail and healthcare, Stewart Hutcheon, says there has been continued asset value appreciation and strong support from institutional investors.
"We see further opportunities within the sector as businesses seek to drive efficiencies in their supply chains and online retail demand continues to rise."
Business News Australia
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