A Man with no Horse
I try not to write bearish items because most of the time it makes you sound smart but rarely provides anything actionable. The only bearish stuff I try to write about is tail risks that I haven't read of elsewhere or what sticks out in my mind, the unknown knowns.
We are investors, being bullish makes you money. Simple as that, if not, go put your money in a term deposit (see above).
Sir Joye of Coolabah finally got his opening, a sale of a Sydney office asset at a lower value than what was carried on the Dexus books. I'd argue he makes a lot of remarks by someone who doesn't have a horse in the race, no skin in the game is an easy way to make comments about how the commercial property market is about to collapse but its all noise and sensationalising to capitalise on eyeballs to the name. A very good salesman :)
Let's be dead serious, this news has already been priced in, DXS trades at a cap rate of approx. 6.3% vs their reported cap rate of 4.8%, reflecting a 23% discount to their book.
Front page of AFR, Dexus comes out and sells a non-core asset with low lease life and below ideal occupancy at a 17% discount. Excellent deal in my view, effectively sold at a premium compared to market implied pricing. Dexus, and for that matter the remainder of the A-REIT market, is not overtly geared nor are they forced sellers of any assets. It is difficult to envisage a situation where they are forced sellers, someone please build me a bridge here.
If I did a quick test of the office REIT market today. (I'm arguing for the sake of arguing).
- Office occupancy is moving up from all-time lows, will get higher because believe it or not, workers will go back to work eventually. I am going to argue that this has bottomed out.
- Implied valuations suggesting a 20% discount across the board.
- Most have their debt book over 50% hedged at very low rates. But this is a headwind as it rolls off.
- Unfortunately, most REITs only have exposure to 3-4% growth rental growth, missing out on the supercharged inflation tailwind.
- Rates are going the wrong direction suggesting cap rates will continue to widen.
- Investing in this space becomes a 2 factor play, fundamentals and what I like to call "market mercy".
- Fundamentals aren't bad, low gearing, higher occupancies, Aus continues to become more populated meaning demand for property of all types continues to increase.
- You are truly at the mercy of the market however, investing means you need to take an active bet on direction of rates to get comfortable.
So where are the problems as they stand today? Yes, they largely lie in the unlisted space where there is in incentive to launder volatility, investors (industry funds?) with lots of capital chasing low volatility and high single digit returns. Do they become forced sellers? Hard to see that happening unless you see PMs & CIOs move to completely remove those assets off their books. And I'm going to bet they're neither desperate nor insane enough to do that.