Dexus Fund Sees Core-Plus Returns in Australian Commercial

The Dexus Wholesale Property Fund (DWPF) is achieving core-plus returns from a core risk profile, according to its manager. Brad Collier, head of diversified funds at Dexus, told the Mingtiandi Australia Forum that strong rental growth and high income yields are boosting the appeal of established Australian commercial properties.

The A$13 billion open-ended fund returned 9.3 percent for the year to 30 June. This was its strongest result in four years and exceeded its benchmark. Collier said the fund has also cleared a redemption queue that surpassed A$1 billion less than a year ago. Sales of lower-quality assets and purchases by existing and new investors provided the necessary liquidity.

"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," Collier said. "They're seeing returns of 9.3 percent for what is a core portfolio."

Sydney Drives Performance

DWPF's significant allocation to Sydney and premium office assets helped drive its outperformance. Collier pointed to Gateway at 1 Macquarie Place, the fund's largest office building, as an example of a tightly held asset. High yields and rental growth are supporting returns without cap-rate compression, a combination Collier noted he last saw after the global financial crisis.

"Those two things often don't coexist for long," he said, adding that yields would normally tighten over time. The current interest rate outlook makes an early shift unlikely, however.

Retail Yields and Development Upside

Retail presents opportunities on several fronts for the fund. Collier outlined three key advantages. DWPF's shopping centres yield more than 6 percent, which is higher than the less than 5 percent yields for its office and industrial assets. Annual retail sales growth of 5 percent supports rent increases despite broader consumer sentiment being weak. 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. The fund favors large discretionary malls with surrounding sites that could be rezoned for residential use.

At Warringah Mall in Sydney's Northern Beaches, which DWPF co-owns with Scentre Group, plans include over 1,500 apartments across six towers. Collier said this development could double the fund's investment in the asset over time. The fund's retail portfolio benefits from occupancy above 99 percent, giving landlords greater use in rent negotiations.

Melbourne's Diverging Path

Melbourne retains long-term scale and potential despite a weaker office market, according to Collier. He cited the city's office sector, which is only slightly smaller than Sydney's, and its large western industrial markets. Retail is performing well and population growth remains strong.

However, Victoria's absentee owner surcharge and constrained state finances complicate property investment. These factors may give domestic buyers an advantage over foreign competitors.

Collier traced the current divergence between Brisbane and Melbourne's office markets to pre-pandemic conditions. Melbourne's low vacancy a decade ago spurred new development, while Brisbane had more empty space. Prolonged lockdowns and a stronger shift to working from home left Melbourne struggling to absorb new supply just as Brisbane's market tightened.

DWPF currently has a low allocation to Melbourne, where high vacancy and leasing incentives weigh on performance. Collier finds encouragement in the crowds filling Melbourne's CBD after hours. When asked if this made Melbourne offices a contrarian buy, he was cautious. "Melbourne will be back. I'm not sure if now's the time quite yet," he said.