Australia’s improving employment and population prospects have prompted the country’s largest office tower owner Dexus to upgrade its earnings guidance after delivering a net half year profit of $997.1 million.
Rising property values across its office and industrial portfolio underpinned the strong performance with revaluation gains contributing $730.2 million to the bottom line.
Dexus said it will initiate a share buy back for about 5 per cent of its register.
Rising demand for health services will also see Dexus expand its new healthcare fund. The fund has two assets, the
Calvary Adelaide Hospital and North Shore Health Hub, a 15,000-square-metre multi-health facility next to Royal North Shore Hospital in Sydney.
Dexus said there are other opportunities that will see the fund grow to an excess of $800 million. There was strong interest in the sector from global and domestic investors prompting Dexus to launch a further equity raising in the coming months.
Funds from operations - the industry’s preferred earnings measure - rose 8.7 per cent on the previous period to $321.8 million.
The rosy outlook was here to stay, Dexus chief executive Darren Steinberg said.
“Australia is set to continue to benefit from global economic growth, population growth and considerable construction activity in the infrastructure sector over the next two years,” Mr Steinberg said.
“We believe this will have a positive flow on effect on demand for office and industrial space over the same time period.”
Most of Dexus’ valuation uplift was from further capitalisation rate compression - the rate of return based on income - in Sydney and Melbourne’s office markets.
Macquarie Equities analysts said the slight upgrade was positive.
''We continue to believe growth optionality exists with a relatively under geared balance sheet and a healthcare real estate mandate that is likely to be aggressively pursued alongside third-party investors''.
''We accordingly continue to see upside risk to our earnings whilst the fundamentals of the Sydney and Melbourne office markets remain sound,'' the analysts said.
The average cap rate across the group’s portfolio has tightened 29 basis points over the past six months to 5.66 per cent, near historically low levels that suggest a peak in the property cycle.
Cap rates for Dexus’ large office towers, which include the newly acquired MLC Centre in Sydney and Melbourne’s QV complex in Lonsdale Street, contracted to a historically tight 5.5 per cent by the year’s end.
Industrial cap rates had tightened to 6.65 per cent, Dexus said.
High levels of leasing inquiry in the troubled Perth market were translating into commitments to take space, Dexus’ office and industrial general manager Kevin George said.
“In Sydney we’ve achieved office leasing spreads of +16 per cent and over the past 18 months have benefited from the trend of large companies in the health, insurance and pharmaceutical sectors centralising into the CBD, while in Melbourne the education sector has grown its footprint in the CBD,” he said.
“Our industrial portfolio continues to benefit from an uptick in logistics and e-commerce demand, which contributed to an improvement in occupancy to 97.5 per cent,” Mr George said.
Dexus will distribute 23.7¢ per security, a 9.2 per cent increase on the previous corresponding period. The group's gained 0.54 per cent during trade Wednesday, closing at $9.23.