SYDNEY - Australia's largest landlords have announced a string of downgrades to the values of their office block portfolios over the past month, but not by enough to humour investors.
While publicly traded commercial real estate markets have plunged, the hit to unit prices has not shown up fully in asset valuations, creating a stalemate between relatively upbeat landlords and buyers waiting for deeper discounts.
Office blocks are at the centre of the standoff. Emptied during COVID, workers have been slow to return to offices, while higher rates have hit property values just as debt gets more expensive to service.
Real estate investment trusts (REITs) such as Dexus , one of the country's largest office owners, Charter Hall Group, and Centuria Office REIT downgraded portfolios between 4% and 8% in bi-annual independent valuations over June and July.
Added to valuations from December, major REITs, which build, own and operate property assets, have marked down office portfolios by roughly a tenth or less over the past year. Non-office assets have fallen even less.
That's a fraction of the decline in public markets. Dexus shares have fallen 28% since 2022, while Charter Hall has nearly halved. The Australian REIT benchmark is still a fifth off pre-COVID levels despite a 4% rise this year.
While such divergence between public and private valuations isn't uncommon due to prime property owners being unwilling to mark holdings down, the yawning gap reflects broader uncertainty about the sector.
"Buyers aren't willing to pay the price from the last valuations," said Winston Sammut, an investment manager at Sequoia Financial Group and a former executive at Charter Hall. "You can put a value on stuff but if no one's wiling to pay that price, it's not a true value."
REITs argue their portfolios are flush with premium buildings and filled with tenants. In response to questions from Reuters, Centuria said valuations for smaller offices are holding up well and referenced its 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 respond to requests for comment.
Investors are divided about whether unlisted prices will fall as far as public markets, but even optimists are wary. Grant Berry, a REIT portfolio manager at SG Hiscock & Company, calls a 30% drop in prices "heavy handed" but flagged the possibility of 20% fall.
Unlisted valuations are expected to settle at similar levels to public market pricing, with discounts around the 20% to 30%, according to investment bankers.
One recent high-profile sale underscores the downside risks. Dexus last month sold a premium downtown Sydney skyscraper for A$393 million, a 17% discount to the December valuation.
Faced with the prospect of big discounts, owners are pulling sales. U.S. private equity giant Blackstone and Chinese insurer Ping An both paused high-profile Sydney office block sales this year after lowball bids, local media reported. Blackstone declined to comment and Ping An did not respond to a request for comment.
Valuers can justify keeping downgrades modest as long as there are few big sales against which to benchmark prices, according to Amy Pham, a REIT fund manager at Pengana Capital Group.
"Valuers aren't doing themselves any service by being cautious. The more they hold back, the more buyers and investors will hold back."
BREAKING THE DEADLOCK
Growing pressure on owners to pay investors scrambling out of unlisted property funds may ultimately force them to sell buildings to raise cash, effectively breaking the deadlock, Sammut said.
"Money is queuing up to get out before the valuations are fully adjusted for the rate increases," he said. "As more redemptions come through, it creates pressure for more sales."
Charter Hall has already curbed how much investors can withdraw from one of its largest unlisted office funds as it struggles to find buyers at prices it believes are fair.
In the United States, 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.
"Hostplus, that's a start," said Pham. "We're looking to see whether the fund managers, the Charter Halls, the Centurias, the Dexus are also getting large redemptions."
($1 = 1.4628 Australian dollars)
(Reporting by Lewis Jackson. Additional reporting by Scott Murdoch. Editing by Sam Holmes.)