Dexus Fund Manager Sees Core-Plus Payoff From Australia's Core Assets
Dexus Wholesale Property Fund returned 9.3 per cent in the year to 30 June, its strongest result in four years, and has cleared a redemption queue that exceeded A$1 billion. Manager Brad Collier says high yields and rental growth are supporting returns without cap-rate compression, with retail and M
Dexus Wholesale Property Fund (DWPF) is delivering core-plus returns from a core risk profile, according to manager Brad Collier, as strong rental growth and high income yields lift the appeal of established Australian commercial properties. The A$13 billion ($9.4 billion) vehicle returned 9.3 per cent in the year to 30 June, its strongest result in four years and above its benchmark, Dexus's head of diversified funds told Tuesday's Mingtiandi Australia Forum in Sydney.
The open-ended DWPF, which invests across office, retail and industrial assets, has also resolved a redemption queue that exceeded A$1 billion less than a year ago. Sales of lower-quality properties and purchases of units by existing and new investors helped provide liquidity, Collier said. “What's been really interesting, particularly over the last six months or so, is that those units have been taken by existing and new investors who are seeing that we're past the bottom of the cycle,” he said. “They're seeing returns of 9.3 per cent for what is a core portfolio.”
DWPF's large allocation to Sydney and premium office assets helped drive its outperformance, with tenants paying more for space that attracts staff back to work. Collier cited Gateway at 1 Macquarie Place, the fund's largest office building, as an example of tightly held stock that had remained in its portfolio for decades. High yields and rental growth are supporting returns without cap-rate compression, a combination Collier last saw at the post-financial-crisis trough. “Those two things often don't coexist for long,” he said, adding that yields would normally tighten over time, although the current interest rate outlook makes an early shift unlikely.
Retail offers interesting opportunities on three fronts, Collier said. DWPF's shopping centres yield more than 6 per cent, against less than 5 per cent for office and industrial, while 5 per cent annual retail sales growth supports rent increases despite weak consumer sentiment. Dominant malls serving expanding catchments offer the strongest prospects. “But the third thing about retail, which is really the cherry on top, is the development opportunities on the land that sits around the shopping centres,” Collier said. At Warringah Mall in Sydney's Northern Beaches, which DWPF co-owns with Westfield operator Scentre Group, Collier described plans for more than 1,500 apartments across six towers that could double the fund's investment in the asset over time.
Melbourne retains an “enormous amount of scale” despite its weaker office market, Collier said, pointing to the long term prospects for the city, including an office sector only slightly smaller than Sydney's and a set of western suburbs that rank among Australia's largest industrial markets. Retail is performing well in Melbourne and the city continues to benefit from strong population growth, he said. But Victoria's absentee owner surcharge and constrained state finances make property investment harder, potentially giving domestic buyers an advantage over foreign competitors.
DWPF currently has a low allocation to Melbourne, where high vacancy and leasing incentives weigh on performance. Yet Collier takes encouragement from the crowds filling the CBD after hours and on weekends, suggesting residents remain willing and able to travel into the city. Asked whether that made Melbourne offices an attractive contrarian investment today, Collier stopped short of calling the turn: “Melbourne will be back. I'm not sure if now's the time quite yet.”
