CEO's Report
Sydney Harbour view with Governor Phillip Tower, Australia Square and Gateway (the latter owned by DWPF) in foreground.
Strong performance in a tough climate
In challenging market conditions, the active management focus of our experienced team continues to deliver good results. Operating earnings for the year ending 30 June 2009 were up 5.7% to $526.3 million. This result reflects the underlying quality of our Australian office and industrial portfolios, which delivered solid like for like growth of 4.5% and 4.1% respectively.
The economic downturn has resulted in a slight decline in overall occupancy levels to 91.5% (2008: 93.8%), with average lease duration remaining steady overall at 4.8 years (2008: 4.8 years). Despite weaker tenant demand we have achieved solid leasing activity, a reflection of our proactive management approach and strong relationships with our tenants.
Adverse market conditions were reflected in a softening of capitalisation rates and weaker underlying property fundamentals, causing a decline in property valuations worldwide.
At 30 June 2009 we revalued the entire property portfolio with 59.8% externally valued. The deterioration of property fundamentals in the US and Europe resulted in devaluations and impairments in our international industrial portfolio.
While property fundamentals held up in Australia in the first half, during the second half of the year we experienced lower levels of market confidence and decreased demand for office and industrial property, which ultimately resulted in unrealised devaluations and impairments across the portfolio totalling $1.6 billion.
The devaluations together with unrealised mark to market derivative losses of $244 million were offset by a $130 million deferred tax benefit (primarily arising from the tax effect of the US property devaluations), resulted in a net loss attributable to security holders of $1.5 billion.
Fluctuations in our property valuations, can lead to significant unrealised gains or losses, depending on the change in fair market value of our properties from period to period. Overall, since the valuation peak in December 2007, we have seen a decline in book value of 19%. However, looking ahead we expect that property devaluations and impairments are nearing the bottom of the cycle. We expect to see a return to underlying property fundamentals, such as rental growth rates, tenant retention and assumptions on time required to lease the space, being the primary drivers in valuations.
As at 30 June 2009 total assets stood at $8.4 billion of which 92%, or $7.7 billion, are direct properties.
