Thank you for standing by, and welcome to the Dexus 2024 annual results briefing. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Ross Du Vernet, Group Chief Executive Officer and Managing Director. Please go ahead.
Good morning, everyone, and thanks for joining us today for our 2024 full year results presentation. I'd like to begin today by acknowledging the traditional custodians on the lands on which we operate and pay our respects to their elders, past and present. Today, you'll hear from Keir on the financials, Andy on office, and Chris Mackenzie, who we welcome as our new EGM for industrial. Chris has been with Dexus for nine years, most recently leading the Industrial Transactions and Development Group. I'll cover funds management and our priorities ahead, and then open up to any questions you may have. I feel very privileged to be leading Dexus at an important inflection point in its history.
Dexus today is a unique, diversified real asset platform of significant scale and critical mass in each of our sectors, geographically focused in Australia and New Zealand, with access to diverse pools of capital. Our AUD 14.8 billion balance sheet portfolio is largely invested in high-quality office and industrial real estate alongside third-party clients. Third-party capital accounts for almost three-quarters of the platform assets. The platform has a well-established presence in office, industrial, and retail real estate, and an emerging presence in the growth markets of healthcare, infrastructure, and alternative investments. We see opportunities in each of these sectors. This combination of balance sheet scale, multi-sector expertise, tight geographical focus, and access to broad and deep pools of third-party capital is unique.
The business is well-positioned given shifts in the investment cycle, with future returns expected to be driven via fundamentals, asset selection and creation, and asset management. The recent addition of infrastructure to our platform presents tremendous opportunity for growth, underpinned by macro tailwinds. We are actively exploring how we leverage expertise from other sectors to extract more value from infrastructure assets. This year, we took the opportunity to pressure test the strategy, refining it to align with our strengths and market conditions. Our purpose, Unlock potential. Create tomorrow, reflects our unique ability to create value for our people, customers, investors, and communities over the long term. Our vision is unchanged: to be globally recognized as Australasia's leading real asset manager. We aspire to be known for our deep local sector expertise, our active approach to management, and as a trusted partner investing alongside our clients.
Our people, our focus on sustainability and governance, and our culture that promotes constant evolution and improvement are central to how we unlock potential in the business and will enable us to deliver superior risk-adjusted returns over the long term. Turning to the FY 2024 result. In a challenging environment, we delivered on our guidance and maintained high occupancy across both our office and industrial portfolios, ensuring strong cash flows with AFFO of AUD 516 million. We continued our capital recycling strategy with AUD 1.7 billion of Dexus divestments, of which circa AUD 700 million exchanged since the FY 2023 result. These divestments have enabled a strong balance sheet with gearing towards the low end of our range, despite the impact of softer than expected valuations. A number of the core funds outperformed their peers and benchmarks.
Our flagship diversified fund, DWPF, and the Shopping Centre Fund are particular call-outs. It's pleasing to see the Shopping Centre Fund outperforming since joining the Dexus platform. We raised new equity in growth markets, including more than AUD 300 million for the second fund in our opportunistic series. We also sold AUD 2.9 billion of fund assets during the year to facilitate redemption requests and to manage the capital position of the funds, and our people have worked hard over many months on the AMP Capital transaction to ensure its successful and full integration. We delivered on the priorities I announced in May this year, refining our strategy, refreshing our capital allocation framework, including updating the distribution policy from FY 2025, and implementing a sector-aligned operating model.
The sector-specific business units are supported by teams with deep sector expertise, who are empowered to develop end-to-end strategies that drive investment performance in their unique competitive domains. In addition, our infrastructure investment management business is now embedded into the funds platform. We continue to be globally recognized for our leadership in sustainability. However, we are increasingly focused on initiatives that make both financial sense and have a positive impact for our customers, the environment, and our communities. Our Waterfront Brisbane development provides an example of waste initiatives coming to life. The development is underpinned by circular economy principles with the goal of minimizing waste. 98% of the materials cleared from the site have been recycled or reused. This has been achieved at nominal cost, but it has required our teams to challenge the established way of doing things for ourselves, our partners, and our service providers....
This has been a big achievement, and we are excited at the learnings we can apply to future developments across all the sectors. I now pass you off to Keir to cover off on the financials.
Thanks, Ross, and good morning, everyone. Turning to the composition of the result, we have continued to diversify our earnings this year, with the contribution from management operations growing significantly, while trading profits reduced following an elevated result last year. Our high quality and resilient investment portfolio continues to generate the majority, or 83%, of our income. Over time, the investment portfolio is expected to continue to diversify from active capital recycling and a wide investment opportunity set, including co-investments. Turning to the result in detail. Despite the continued impact of higher interest rates, our underlying FFO demonstrated resilience and was up 0.7%. Office and industrial FFO both reduced this year, primarily due to the impact of divestments, partially offset by fixed rent increases and recently completed developments. For the industrial portfolio, higher one-off income also made a positive contribution.
Income from co-investments in pooled funds almost doubled, driven by new investments in AMP Capital platform funds. FFO from management operations increased to AUD 143 million, mainly reflecting the AMP Capital transaction and AUD 28 million of performance fees during the period, partly offset by the impact of divestments and valuation declines on FUM, as well as lower development milestone-related fees compared to FY 2023. Group corporate costs increased due to the AMP Capital transaction as well as inflation, and as part of the recent operating model refresh, we have done a lot of work to manage costs in this environment. Net finance costs reduced, with the lower average debt balance more than offsetting higher interest rates. Other expenses also reduced, driven by lower FFO tax expense as a result of interest costs associated with the higher debt balance within our tax-paying trust, DXO, following recent acquisitions.
As expected, when we set initial guidance, lower trading profits were the primary driver of the reduction in AFFO and distributions to AUD 0.48 per security, which was in line with guidance. Higher interest rates and transactional evidence continued to impact valuations this year. The total portfolio declined by AUD 1.9 billion, or 12.9%, on prior book values for the 12 months to 30 June. The value of the office portfolio reduced by 15.6%, while the industrial portfolio reduced by 3.3%. Higher cap rates and discount rates were partially offset by market rent growth. Outside of the stabilized portfolio, devaluations were also taken on office developments and held for sale assets. We have taken a pragmatic approach to both valuations and divestments.
Our office valuations are now off 25% from the peak, and the current yield spread to bonds for key CBD office markets are broadly in line with long-term averages, suggesting we are near an inflection point for office cap rates, and we expect transaction volumes to improve as the interest rate cycle turns. Moving to capital management. Our balance sheet remains strong, with look-through gearing of 32% towards the lower end of the 30%-40% target range, despite the impact of valuation declines, which reduced NTA to AUD 8.97. Pleasingly, we've arranged AUD 1 billion of debt extensions during the year at attractive rates and tenors. We have a weighted average debt maturity of 4.8 years, AUD 2.5 billion of headroom, and manageable near-term debt maturities.
92% of our debt was hedged during FY 2024, providing material interest rate protection over the medium term. Looking forward, there is AUD 1.8 billion remaining spend on the committed development pipeline, with approximately AUD 625 million to be spent in the coming year. From a risk perspective, our developments have fixed-price contracts, and our city shaping office projects are with reputable Tier One contractors. We expect that rising construction costs across the market will challenge the viability of future uncommitted supply, supporting the long-term outlook for market occupancy and incentives. For many years, we have taken an active approach to capital recycling to enhance the quality of the portfolio and the strength of the balance sheet. Despite a subdued transaction market, we've continued to divest assets and have now sold AUD 7.4 billion from the balance sheet over the past five years.
The portfolio is heavily weighted to prime grade office assets in core CBD markets, as well as core industrial assets. We will continue to recycle capital with a further AUD 2 billion of assets earmarked for divestment over the next three years, which, together with the completion of committed developments, will further enhance the quality of the portfolio while maintaining a prudent level of gearing. Thank you, and I'll now hand over to Andy.
Thanks, Keir, and good morning, everyone. We own and manage the best office portfolio in Australia. The decisions we have made over the past five years in relation to divestments, asset management, and de-risking have enhanced the quality and resilience of our portfolio, and we are well-positioned to benefit when the office cycle turns. Despite stubborn market vacancy, our occupancy reduced only marginally during the year to 94.8%, still well above the market average. Effective like-for-like income growth slowed to 0.5%, reflecting amortization impacts and downtime on select vacancies. On a face basis, like-for-like growth was 2.5%. Incentives reduced to 27.9%, again, well below the market average, reflecting the quality and location of our portfolio. We expect both market vacancy and market incentives to remain elevated in the near term.
Construction progress remains on track at our city shaping developments at Atlassian Central and Stage One at Waterfront Brisbane, which will be completed in financial years 2027 and 2028, respectively. Looking at our expiry profile, we aim to have no more than 13% of the portfolio expire in any single year, and we are well below that threshold for the next two years. We are focused on the more challenging vacancies in 80 Collins Street, Melbourne, and 30 The Bond in Sydney. However, much of the upcoming expiry over the next two years sits in assets that are well positioned in their markets. For example, Farrer Place in Sydney, 240 St Georges Terrace in Perth, and One Eagle Street in Brisbane. Our portfolio has proven resilient to challenging market conditions, with occupancy and incentive levels consistently outperforming the wider market over time.
These results can be attributed to the portfolio's high quality and heavy weighting to core CBD markets where customers want to be. In our experience, smaller tenancies generate, on average, higher returns and present less volatility and leasing exposure than larger tenancies. Our scale enables us to invest in the systems and processes to service these customers efficiently. As a result, our customer base is more diverse, with an average tenancy size of just 1,200 sq m. We have less exposure to large customers than our peers. We have proactively diversified our customer base over many years, and as I mentioned earlier, we manage our forward lease expiries within acceptable thresholds. We continue to see materially lower vacancy in the Sydney Core and Melbourne Eastern Core. The Sydney CBD map continues to tell a strong story for the core.
Most of the market vacancy remains concentrated in the western corridor and midtown precincts. The premium buildings in our Sydney portfolio are located within the core, with an average occupancy of more than 99%. This is evidence of the flight to quality and flight to core that continues to contribute to the resilience of our portfolio, even in this environment. As a result of this dynamic, the spread in effective rents between the submarkets has continued to widen. Incentives are likely to remain elevated in the year ahead in both Sydney and Melbourne markets. However, we are approaching an inflection point in vacancy, with Sydney market vacancy expected to peak in FY 2025 and Melbourne expected to peak in FY 2026. Thank you. I'll now hand over to Chris.
Thanks, Andy, and good morning, everyone. We have a proven track record of delivering high-quality industrial product in sought-after locations that is largely being created by Dexus. Our portfolio continues to perform well, albeit with some moderation, as expected, following the very strong run experienced by industrial markets over the past few years. Effective like-for-like growth was 3.9%, impacted by a slight reduction in occupancy. We're in active leasing discussions on the vacant space and remain focused on delivering strong total returns across the lifecycle of our assets. We are willing to accept some downtime if it leads to better deals, and we have factored in reasonable assumptions for the coming year. Incentives rose to 16.5%, and we are seeing some evidence of market incentives increasing as customers look to invest more in automation and sustainability initiatives.
The portfolio is 15.4% under-rented, creating the opportunity to grow, grow income by resetting the rents across approximately 26% of the portfolio by FY 2026. Margins remain attractive across the development pipeline, with 150,000 sq m underway and more than 80,000 sq m leased this year. We also completed 160,000 sq m of premium product at our estates in Ravenhall and Jandakot. While the vacancy has lifted in outer markets, supply under construction remains in check at around the same level as demand, which continues to be supported by e-commerce and population growth. Bifurcation is expected to play out further across the market, with well-located quality stock continuing to outperform. Taking a closer look at our portfolio, which is located in high conviction areas selected through unique market insights.
The majority of our relationships are held directly with high-value customers who are growing and aspire to grow. We provide more than just property solutions. We partner with our customers to tackle supply chain challenges using our deep market knowledge and portfolio footprint. I'm really excited about the opportunities this brings. Developments have made significant contribution to our platform fund, with large-scale, high-quality precincts developed and delivered by us, accounting for around half of the portfolio. The ongoing growth of e-commerce has increased the demand for smaller format package handling facilities to facilitate efficient last-mile delivery to consumers. These facilities are integral to our end-to-end property solutions and complement the large format facilities we have developed for our customers. Our assets are designed with flexibility to meet customers' long-term needs and include market-leading sustainability initiatives focused on operational efficiency, such as battery infrastructure to support rooftop solar PVs.
This approach has enabled us to capture repeat business, as we have done with the likes of HelloFresh and Amazon at Ravenhall and Jandakot, along with DHL at Richlands and Greystanes. Thank you, and I'll hand over to Ross.
Thanks, Chris, and turning to funds management. The funds business is a key plank of our strategy and a differentiator against our global peer set. Third-party capital plays an essential role in improving our capital efficiency, enabling outsized scale benefits, which we share with our clients, and providing avenues for diversification and risk reduction, be that project, sector, or revenue type. We have a proven track record of delivering performance for our clients, which underpins the deep relationships we have with more than 130 institutional investors. Our AUD 40 billion funds management business is diversified across sectors and investor types. We actively divested assets across a number of funds to maintain prudent gearing levels and facilitate redemption requests to meet client needs, an important part of our proposition as a leading fund manager and a reliable long-term partner.
As you can see on the bottom right of the slide, it's been a tough market to raise capital globally. There is a cyclical aspect to this. As investor confidence returns, we have done the work to be in a preferred position with the right product suite, an aligned model, and a track record of delivering for clients. Turning to funds highlight, highlights from the year. As I mentioned earlier, our flagship funds continue to outperform their benchmarks. The AUD 13 billion diversified Wholesale Property Fund outperformed over all time periods, and the Shopping Centre Fund materially outperformed for the 12-month period. Despite the subdued capital raising market, we continued to harness pockets of opportunity. As I already mentioned, we raised funds in growth segments, including the first close for DREP II, which has strong interest in future closes.
We also gained independent recognition for the strength of our client relationships and our achievements in ESG. We want to be invested alongside our clients and funds, be that JVs, clubs, asset co-ownership, or fund co-investments. Our balance sheet is increasingly being invested alongside our capital partners. More than 70% of the balance sheet is now co-invested with our funds or clients. This includes AUD 1.5 billion of co-investments in funds across healthcare, industrial, retail, office, infrastructure, opportunistic, and other investments, which contribute 8% to our earnings. These co-investments also enable us to align with investors and support the growth in the funds management business. The chart on the right-hand side shows how both the proportion of capital we have invested alongside clients and the efficiency of that capital have increased over time. We expect this will continue further as we execute on the strategy.
The overarching principles guiding our priorities are to ensure the business is set up to drive long-term, sustainable returns and to be in a position to capitalize on opportunities in the near term. Capital allocation is an important part of how we can create value, and we have evolved and formalized our approach. We've established a clear hierarchy for how we allocate, deploy, and manage our capital to protect downside risk, promote active management, and drive improved risk-adjusted returns for security holders over the long term. The principles and framework guiding our long-term decisions are outlined on this slide. Importantly, we apply these to how we think about existing investments as much as new ones. I appreciate the concepts here are not new, but the application to our business is particularly important given the diverse opportunity set and our strong preference to organically fund growth.
Our target settings and actions are outlined on this slide. Our target gearing range remains unchanged, and over time, we expect any single sector to represent less than 50% of the portfolio. We have earmarked circa AUD 2 billion of divestments over the next three years, which, together with the completion of the committed developments, will further enhance the quality of the portfolio while maintaining a prudent level of gearing. Consistent with our strategy from FY 2025, our distribution policy has been updated to pay out 80%-100% of AFFO, providing a sustainable source of capital to invest in growth alongside our clients. The new policy range seeks to achieve a balance of providing appropriate distributions to security holders and investing for growth.
As we approach the bottom of the cycle, we are seeing attractive investment opportunities, and in the near term, expect retained earnings to be invested alongside capital partners in high-returning strategies in infrastructure, industrial, and alternative sectors, which continue to benefit from strong tailwinds and provide the opportunity to leverage our capability to enhance returns. A simple example is DREP II, where our AUD 50 million co-investment will represent 5% to 10% of the fund, with a target return of 15%, with the Dexus return to be further enhanced by the management fees, and so well above our cost of capital. We've set some clear medium-term goals to align with our strategic priority areas. First is to transition the balance sheet.
We intend to increase co-investments alongside our fund clients, upgrade the office portfolio via divestments and development completions, and continue capital recycling with circa AUD 2 billion earmarked over the next three years. Second is to maximize the contribution of funds through providing liquidity and delivering performance for our funds clients, completing the final close for DREP II, and launching new funds and products to match investor demand, and modernizing the legacy AMP Capital platform products. And finally, to unlock our deep sector expertise by embedding our sector-oriented operating model across the platform, maintaining high customer satisfaction, and position the infrastructure business for growth. While conditions remain challenging, we are confident in our future. We expect well-located, quality assets to continue to outperform and clients to gravitate to stable, aligned managers with deep sector expertise.
As the interest rate outlook becomes more certain, direct investors should gain greater confidence to deploy capital. The higher cost of debt, as well as the full year impact of valuation declines and divestments of funds under management, will continue to impact our FY 2025 result. Barring unforeseen circumstances, for the 12 months ended 30 June 2025, we expect AFFO of circa AUD 0.445-AUD 0.455 per security and distributions of circa AUD 0.37 per security. Dexus is well positioned. While there are some near-term headwinds, the initiatives I have talked through today are focused on driving sustainable growth over the long term. We have solid foundations and a differentiated funds platform, strong client relationships, and a diverse product offering. Our investment portfolio is high quality and positioned to benefit as liquidity returns to the office market. Thank you. That ends the formal part of today's presentation.
We'll now take any questions that you may have.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. A reminder to please limit yourself to two questions per person. Your first question comes from Howard Penny with Citi. Please go ahead.
Thank you very much. Just on funds management flows, are you seeing any subsector inflows and maybe some areas where there are outflows at this stage within the various funds management platforms? And then you mentioned that you were looking into new funds and products. Are you able to give any indication of where that interest might be?
Thanks for the question, Howard. As I alluded to in the formal remarks, you know, it has been a tough capital raising market globally, and this is particularly acute in the core space. There hasn't really been a lot of money raised in core. So I think that bodes for how we think about flows in our platform, but also how we're kind of thinking about new products and strategies and where demand is. So yeah, I think what we're seeing, you know, different pockets of that capital, different segments are performing slightly differently. But I think what is most pleasing to me is that for some of these high-returning strategies, you know, DREP II is a really good example.
We've raised over AUD 300 billion in the first close, and there's really strong demand for future closes. So, that final close, I expect that fund to be materially larger than the first fund, which was AUD 475 million. So I think those high return strategies, those more active strategies, value add, asset repositioning, those sorts of things are well supported. Core capital is been pretty difficult, to be honest. I won't say it's thawing yet, but I think some of the data points that we look for is, you know, secondary trades and repricing there, those discounts have come in a lot over the last twelve months.
So I think that gives us some confidence that pricing on secondaries is getting to a level that is more interesting, and that should see fund flow stabilize over the next 12 to 18 months.
Thank you. And maybe just following on that, you, you mentioned co-investment as, as something that you're looking to drive capital into. Do you have a target of what that level might be in the funds?
The level of co-investment for individual strategies will actually depend on the strategy and, in some circumstances, the predisposition or preferences of clients. Philosophically, we wanna be invested alongside our clients. I think this is a really important point, is we wanna find interesting opportunities that we think we can create value in. We wanna invest in them, and we want our clients, we wanna bring our clients in alongside us. That's not for us to dominate deals, but it's for us to have a meaningful amount of skin in the game. And then, obviously, sort of the management economics are cream on top. I would be surprised if it was anything less than 10%. You know, something more than 50% is probably too much, so it's probably somewhere in that range, depending on the strategy.
Great. Well, I'll leave it at the end. Thank you very much, Ross and team.
Thanks, Howard.
Thank you. Your next question comes from Tom Bodor with UBS. Please go ahead.
Morning, Ross and Keir. I just was interested in the guidance on AFFO being down around 6% on this year. Just interested in understanding some of the key drivers around that in terms of assumptions around trading profits, asset sales, debt costs and the like.
Hi, Tom. Thanks for your question. If we look at the guidance range for 2025, the impact of higher net finance costs alone is circa 6% headwind. Outside of that, trading profits are expected to be lower in 2025. The management business will be broadly flat, maybe slightly lower, depending on performance fees. But partly offsetting that, we expect to see some modest growth in the property portfolio and lower tax. Outside of those moving parts, we've made an allowance for divestments within the range, but that will ultimately depend on the quantum, timing, and mix of assets that we sell, so the range that we've provided, there is some variability in there, depending on divestments, performance fees, and trading.
Okay, thanks. Just following on from that, the management being flat, there's obviously cost savings in coming through, but then, you know, someone else in this year's number. Is it sort of right to think that they kind of offset each other?
Yeah, I think that's the right way to think about it. So we've got some headwinds flowing through from valuations, transactions, and a bit of inflation. But what is pleasing is that we've done a lot of work on the cost base, both post the integration and the recent operating model refresh. And so that, combined with sort of circa AUD 10 million higher performance fees in 2025, means they should broadly offset each other.
Sorry, ten million higher in twenty-five or lower?
Higher.
Okay. And then, just a final one for me on the, you know, strategy to get each sector down to below 50% over time. You know, given you've got a pretty meaningful office development pipeline and a starting point that's well above that, do you need to accelerate the pace of office sales to get there? What sort of timeframe are you talking about there?
Thanks for the question, Tom. It's a fair one. We're not gonna be pressured to accelerate sales that destroy shareholder value. We have a very high-quality portfolio and a very high-quality development pipeline. So I think what we're outlining is sort of the goals and the aspiration that we're moving towards. What's pleasing for us is transaction markets look like they're stabilizing. It looks like there is, as I say, kind of a thawing of investor demand around office, and, you know, as that market normalizes, it'll provide better liquidity for us to sell assets into. So we're not gonna be rushed or pressured by it, and we're certainly not gonna destroy shareholder value by trying to achieve some stated objective in the results presentation. So it'll take some time.
You know, when market conditions are right, I'd argue office is probably the most liquid of the real estate sector, so we'll be able to move more quickly, as I say, when things normalize.
So is it right to think more five years than sort of three, if that makes sense?
We don't... I don't... We're not here kind of predicting liquidity levels in the office market over the next 24 to 36 months. But I think what we're saying separately is we've got an earmarked circa AUD 2 billion of divestments, which is assets that we wanna trade out of, which will improve portfolio quality. And in addition to that, if the markets are functioning normally, then we may be able to move and sell a larger proportion of the office portfolio to achieve that circa 50% objective. But it is gonna depend on liquidity in the transaction markets. And, you know, our starting position is we have a very high-quality portfolio, so it's. We've already done a lot of the heavy lifting on, let's call it, the rump, so to speak.
Every asset we're kind of selling now in is actually pretty good kit.
Okay, thanks very much.
Thank you. Your next question comes from Simon Chan with Morgan Stanley. Please go ahead.
Oh, hi. Good morning, everyone. Hey, guys, can you just give me some color on redemptions across your platform? I think, well, six months, a year ago, you might have had AUD 2 billion lined up. Has that been cleared pretty much, and you know, you're all running at a normalized level now?
Thanks, Simon. You know, redemptions continue to be a feature of the marketplace, particularly for core managers. For us, we solved AUD 1.3 billion worth of redemptions in the financial year. We sold AUD 2.9 billion worth of assets within the funds platform, in part for redemptions, in part for ensuring the capital position of the funds. Outstanding redemptions at the moment stand at about AUD 2.5 billion across all strategies. It's not quarantined into kind of one segment. Whether or not we are required to kind of satisfy all of those or investors' sentiment changes as pricing stabilizes, I think the next kind of six to twelve months will tell. But that's the current state of play.
I think the pleasing thing for us is where new demand is coming in from clients at the moment, and these kind of high-returning, value-add type strategies. You know, DREP II, as I've already flagged, is a really interesting case study, and there's new initiatives which we're working on, which we'll be bringing to market over the next 6-12 months in that high-returning space. And that is, in part, you know, changes to the distribution policy will provide us with capital to invest alongside clients in those strategies. So I think there's, you know, there'll be a reasonable amount of flow out, but there'll also be flow in as well.
Great. And just a follow-up question, for Keir in relation to FY 2025 AFFO moving parts. Hey, what is the exact increase you're expecting in terms of weighted average cost of debt in FY 2025 versus FY 2024?
So the weighted average cost of debt this year was 4.1%, and we're expecting that will move to mid-fours in FY 2025.
And that, that's causing you the 6% headwind?
That's right. That, combined with, capitalizing interest on a lower cost base in 2025 relative to 2024.
Because 123 Albert Street comes out, I assume?
Yeah, largely one, two, three Albert coming out.
Okay, that's all I got. Thanks, Keiy.
Thank you.
Thanks.
Thank you. Your next question comes from Ben Brayshaw with Barrenjoey. Please go ahead.
Good morning, Ross. Thanks for your time. I was wondering if you could just discuss what potential there might be to become more capital light on the development spend, which is committed. So just on slide 12, whether you're expecting that AUD 1.8 billion of development capital will be taken through to completion, or whether you see opportunity to sell down your interest in that pipeline over time.
The vast majority of that development spend relates to the two office development projects. There'll also be some of the industrial land banks in there. With the exception of Atlassian, all of those projects are held in some sort of structure already with third-party capital. You know, the Jandakot Airport interest, for example, we have a third interest alongside DXI and a domestic pension plan. Waterfront, we own in joint venture with the Diversified Wholesale Property Fund. So Atlassian is probably the big needle mover. As we've said pretty clearly, you know, selling a hole in the ground is probably not a value-maximizing strategy for that project.
I think as the project gets closer to completion and transaction markets stabilize, I think that product will present well, and there will be opportunities for us to reduce that spend, but it's probably not something that's going to happen in the next 12 months. That would be a reasonable working assumption.
Just on the incentives and CapEx that have come in at AUD 185 million-AUD 190 million for the last couple of years, do you see those as being stabilized going forward, or just how are you thinking about the trajectory of the capital requirements for the next 12 months?
Andy, do you want to pick that one up?
Yeah, sure. So we spent more capex with leasing skewed to the last quarter. And we also invested to improve some spaces in terms of their leasing appeal. So I would expect to see less works as a component of maintenance CapEx come down next year. But on the whole, sustaining business CapEx, I expect, will be broadly flat due to higher incentives, much of which has already been committed from leasing completed in prior years.
Great. Thanks for your time.
Thank you. Your next question comes from Richard Jones with JP Morgan. Please go ahead.
Good morning, Ross. Just in relation to the pipeline of asset sales over the next three years, can you give us a rough breakdown of what you expect will be office? And secondly, whether you expect any of those assets will be sold within the Dexus platform?
Thanks for the question, Richard. I think given the existing portfolio is 2/3 office, it's fair to assume that the vast majority of those sales will be office. It will also help contribute to that objective we talked about, which is getting us every sector below 50%. Will they stay in the Dexus platform? To be frank, it depends on the asset and why we're selling it, and pricing considerations. If we're selling the asset because we think it's got return challenges, it doesn't make a lot of sense to sell that problem to a client. That would be inconsistent with our vision of being, you know, the leading real asset manager in the country. So I think those assets will leave the platform.
There'll be some assets that are really good assets that clients are looking to recycle capital out of, and if we can bring new capital in, then we'll do that. So I think it will certainly kind of... it'll be a bit of a horses for courses approach.
Okay, second question. Thanks, Ross. Just Dexus' point of difference as a global stock for investors is, you know, has been regarded as an Australian, and in particular, a Sydney CBD office specialist. Your strategy is clearly diversifying away from that, you know, arguably competitive advantage. Do you think you're making the call at the right point in the cycle to be doing this?
... If the question is, are we looking to step back from office? I think the evidence is to the contrary. If anything, we're investing heavily into office, and our expectations of what is going to drive returns out of office is gonna be much more nuanced in this next part of the cycle than maybe what it has been in the past. And that is, to be frank, it's true in office as it is in many of the other sectors that we're seeing. We're seeing much more bifurcation and variation in asset performance. And so I think for us, as we think about the office portfolio, we're making big investments. We're big investors in office. We have a great platform, ably led by Andy. Office will continue to be a very meaningful part of our business for the foreseeable future.
We're not stepping back from office. I think what is exciting for our business is we have a very diverse and deep platform, and that is presenting a number of opportunities that we have access to, and we're very excited by those, and we think we can generate really attractive returns by investing in those opportunities alongside our clients. We have a good track record in that space as well. If you look at funds like DWPF, which has outperformed the index and benchmarks over one, three, five, seven, and ten years, I think we've got the runs on the board that we can deploy and invest across sectors other than purely office.
Okay, thanks, Ross.
Thank you. Your next question comes from James Drees with CLSA. Please go ahead.
Yeah, good morning. A couple of questions. Firstly, just on the payout ratio being reduced to 80%-100% of AFFO. Is the message there that you'll largely be reinvesting in new products, and that's your co-invest share? And if so, you're sort of saving around AUD 100 million a year. Are you expecting to deploy that in guidance this year?
Look, I think the change in policy, just to put in context, it's not something that we do every year. The last time we looked at the policy was ten years ago, and so the change in policy is really a reflection of kind of the change in business mix and really the successful execution of the strategy to date. In terms of what we're guiding towards, obviously, guidance, distribution guidance implies we're paying out at the low end of that range. You know, we've already made a commitment into DREP II of AUD 50 million, so that's circa kind of half of, or a bit over half of what that retained earnings would be, and there's, as I flagged on the call, there's other initiatives that we're working through as well.
So, I think it'll be in that range, and I think, you know, the pressure's on the team to generate attractive opportunities for us to be co-investing alongside clients. And I think if there's a positive in here, I think, you know, I'm very excited that we have clients who want to deploy capital with us right now in many of these high-returning opportunities and strategies. So that's, you know, that's what the team are focused on, and hopefully, we'll have some news to report on that over the next 6- 12 months.
Okay, and then secondly, on the asset base. So the office portfolio's come back a bit. Some of the more recent transactions, like Martin Place, seem. It seems like there might be a bit more to go. Can you just talk to how you sort of see the outlook for valuations and also, just touch on maybe the write-downs or the revals you've made to the development portfolio so far?
I might just provide some kind of general comments on market outlook, and then we might pass to-
Sure.
To Andy or Keir to talk about the specifics. I think as a general proposition, we kinda see valuation's gonna be much more nuanced in this part of the cycle, and that you're gonna... Well, we'd like to talk in generalities. You know, asset-specific performance is gonna be driven by kind of micro factors and asset-specific factors, and that certainly is what drove us or encouraged us into the divestment of 5 Martin Place. It's a great precinct, but there are some, certainly some asset-specific factors that caused us to consider the sale or execute on the sale. In terms of the cycle more broadly, I think, we're not calling the bottom, but there's certainly a lot of signs and data that give us confidence that we're certainly approaching the bottom.
You know, rate expectations, office valuations were 25% below our peak. The occupier side is certainly improving. You saw our incentives this year actually were lower than last year, and that trajectory is continuing. We're kinda seeing peak vacancy in Sydney in FY 2025, and clients are looking to invest, and we're seeing more liquidity emerging on the transaction side. So I think all of those things point to a, you know, we are approaching the bottom in terms of pricing, but I think the actual outcome's gonna be quite varied, depending on the asset-specific characteristics, and we kind of see that in the leasing outcomes, and we're gonna see that in the transaction market as well. Andy, I don't know if there's anything to add on the development book or write-downs or Keir?
Maybe I'll take the development book more broadly to start with. Thanks for the question. And if we look across the board, we've written down close to AUD 400 million for the development book. That's predominantly office assets, as you would expect. Industrial developments were broadly in line. The actual result, asset by asset, varies. So while there's been cap rate expansion across the board, you know, there's been a material impact for something like Atlassian, whereas Waterfront, we've been able to recoup that with the rental growth that we've been achieving with leasing at that asset. So we think, you know, fair to say vals are having an impact, but, you know, as I said earlier, credit office yield spreads are now approaching long-term averages, which is, I think, a pleasing sign that we're reaching an inflection point.
Thank you.
... Thank you. Your next question comes from David Poblocki with Macquarie Group. Please go ahead.
Good morning. Hope you're well. Thanks for taking my questions. Just the first one around if there are no value enhancing opportunities present at any given point in time, you've mentioned you'll potentially use excess capital to reduce debt or return capital. So I just wanted to ask around how we should think about potential capital returns. For example, if you're at the bottom end of your target gearing range, absent growth opportunities, could we expect capital return that could potentially move you back to the midpoint of the gearing range? How do we think about it?
I think that's a fair kind of description of how we think about the capital allocation model. That decision is really gonna have regard to what the medium-term outlook is in terms of deployment, and so it's not something that we're envisaging right now. I think if transaction markets free themselves up and liquidity returns en masse, then, yeah, I would say kind of the opportunity set and the calculus will change materially, particularly given kind of where the share price is trading. I think all of those things are things that we're actively considering. Right now, with where we sit, you know, gearing is edging up higher. We've got a divestment program we're working through, and we've got, you know, clients that want to invest with us in higher returning opportunities at the moment.
We've got sectors that are identifying some really interesting opportunities, so I think deployment and balancing that kind of rate of deployment is probably going to be the challenge in the short term.
Thank you. And just the second one for me is on the industrial portfolio. I think it was mentioned that you had some higher one-off income in there, so I just wanted to ask what that was, and if you could quantify that, please.
Yeah. The one-off income, hi, David, was related to GE in Jandakot Airport in Perth of circa AUD 9 million.
Okay. Great. Thank you very much. Sorry.
Sorry, just to clarify that one. So this was. We announced this at the half year. Dexus share for that is about AUD 6 million, so just a touch lower.
Okay, great. Thank you very much.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Du Vernet for closing remarks.
Thanks, everyone, for joining us this morning. We look forward to catching up with you through the various meetings over the next few weeks. Have a great day. Thank you.