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Dexus lowers property book values by $1bn

In a significant development for the office and industrial property sector, Dexus (ASX:DXS) , a prominent Australian real estate group, has announced a reduction in the book value of numerous properties. This move, amounting to approximately $1 billion, translates to a 6% decrease in prior book values. The decision was prompted by an independent expert’s report and the prevailing trend of rising interest rates in Australia.

As a result, valuers have adjusted their capitalization rates, leading to the revision of property valuations. Darren Steinberg, the Chief Executive of Dexus, shed light on the factors influencing these adjustments, emphasising both challenges and positive growth within the office and industrial portfolios.

A 7.7% Decrease Dexus reported that the value of its office portfolio experienced a decline of around 7.7% in comparison to prior book values. This reduction primarily stems from higher capitalization rates and discount rates, partially offset by market rental growth. The combination of these factors resulted in a reassessment of the overall value of the office properties. Despite this setback, Dexus remains optimistic about the office portfolio’s long-term prospects and the potential for future market recovery.

A Marginal 0.2% Decline Dexus also observed a slight decrease of approximately 0.2% in the value of its industrial portfolio compared to prior book values. While the impact of higher capitalization rates and discount rates contributed to this decline, it was largely offset by strong rental growth. The industrial sector’s resilience, demonstrated through robust rental growth, cushioned the overall impact on property valuations. This suggests that the industrial segment remains comparatively stable despite the broader challenges faced by the real estate market.

The decision to revise property valuations comes in response to rising interest rates in Australia. As interest rates increase, valuers adjust their capitalization rates to reflect the changing cost of borrowing and the expected returns on investment properties. Capitalization rates, which determine property values by assessing the income generated, are inversely related to interest rates. When interest rates rise, capitalization rates also tend to increase, thereby reducing the overall value of properties.

Despite the downward adjustment in property values, Dexus maintains a positive outlook for both its office and industrial portfolios. The company acknowledges the challenges posed by higher capitalization rates and discount rates but highlights the mitigating effect of market rental growth and strong industrial sector performance. These factors offer potential opportunities for future recovery and growth in property valuations.

Dexus’ decision to reduce the book value of its office and industrial properties by around $1 billion underscores the impact of rising interest rates on the Australian property market. As valuers adjust their capitalisation rates to reflect these changes, property valuations have been revised downward. However, the company remains optimistic about the long-term prospects for its portfolios, citing market rental growth and the resilience of the industrial sector. As the real estate landscape continues to evolve, Dexus is well-positioned to navigate the challenges and capitalise on future opportunities within the office and industrial property market.