Dexus Property Group share price fell yesterday as investors bailed out in the wake of analysts at Morgan Stanley downgrading the securities to an underweight rating from overweight.
The broker has also slashed its price target from $10.20 down to $8.15. Dexus securities fell 3.5% to $8.70 at the close yesterday.
Morgan Stanley has concerns over the Australian office market and expects DEXUS to struggle with its occupancy rates.
It reckons its 4.2 year average lease period is too low and points to Mirvac having an average of more than 6 years.
Back in July Macquarie downgraded Dexus to a neutral footing for similar reasons.
Macquarie Equities says it has dropped its outlook for the office and industrial landlord, noting there are structural and cyclical challenges and “limited valuation support”.
The analysts say that while Dexus should be more resilient with its quality portfolio, they are awaiting evidence of tenants retaining CBD office space before “becoming more positive” on the sector.
That downgrade came ahead of the reporting season when Dexus reported a 23.3% slump in net earnings to $983 million for the June year, primarily due to lower valuations of investment properties than in the previous corresponding period.
Dexus wrote down the value of some assets because of the impact of COVID-19 on rental streams.
While Dexus said it had collected 98% of its rent and has signed new lease deals across its main Sydney and Melbourne assets in the year to June, these deals involved, higher incentives, such as free office fit-outs and rent-free periods, embedded in the rental contracts. All this extra cost comes off future valuations.
Dexus did warn of an expected rise in vacancy rates and lower rents in the coming year and Morgan Stanley’s downgrade seems to reflect that view.