Office REITs/Dexus/DXS

Fascinating analysis from RC on the office to apartment conversions that are underway.

Recall that the pandemic made everyone work from home, many liked that, many companies realised they could lower their office footprint, and so office towers were suddenly worth a lot less on the demand side, and given that the cash rate increased a lot, were worth even less given movements in the discount rate.

However, there’s a shortage of homes, and some old vacant offices can be converted to apartments. For years this was viewed as a modest solution at best, given structural issues (like floorplates) and regulatory issues (the law) made it quite difficult to do, and quite costly to do so.

Well, eventually, life finds a way. At first the conversions were very low, grew a bit in 2022, and then with the 2023 numbers under our belt we can see the material step up to 45,200 extra apartments coming from newly converted office towers. 2024, based on what’s been submitted for planning, should be even better.

This won’t cure the ills facing the office sector overnight. But it is part of how it heals. We own Dexus, in our direct equity portfolios, and Lendlease (big apartment and office developer); both should over-the-long-run be beneficiaries of these improvements at the margin. Given both trade below GFC pricing, that is useful.

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