ASX real estate shares have underperformed the broader market over the past month. The S&P/ASX 200 Real Estate Index (ASX: XRE) is down nearly 3.5% in that time while the benchmark S&P/ASX 200 index (ASX: XJO) is up just 0.27%.
Against the August earnings season backdrop, real estate companies in general have posted softer earnings in FY24 despite some brilliance amongst the pack.
But this week, Dexus (ASX: DXS) and Lendlease Group (ASX: LLC) reported deep financial losses in FY24. Both companies have posted billions in net losses for the year due to write-downs and impairments on the value of their real estate portfolios, particularly in the office sector.
Could an ongoing downturn in office property values and strategic shifts within their businesses be at the core of these issues? Let's dive in and find out why these two ASX real estate shares are losing billions.
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ASX real estate shares report deep losses
Dexus yesterday reported a 4% decrease in investment funds from operations (FFO) in FY24.
But it also booked a $1.58 billion net loss for FY24, largely due to a $1.9 billion write-down on its property portfolio.
Its office towers – which have lost about 25% of their value since their peak before the pandemic – were the primary culprits. Office FFO was down 14% year over year.
In fact, the entire office portfolio's value dropped by nearly 16% over the year, while the industrial portfolio saw a smaller decrease of 3.3%.
However, the ASX real estate share surprised investors by altering its distribution policy. Starting in FY25, the company will distribute 80-100% of its adjusted FFO (AFFO).
The move is designed to provide more flexibility for new investments, mostly in the industrial, infrastructure, and alternative sectors.
But the decision hasn't sat well with investors. Dexus shares have sold off more than 8% since the company released its earnings yesterday.
Lendlease faces similar headwinds
Lendlease Group also had a tough FY24, this week reporting a statutory loss after tax of $1.5 billion.
Similar to Dexus, this was largely due to $1.35 billion in impairments tied to its revised strategy.
An impairment is a permanent decrease in the value of an asset, whereas a write-down is a discretionary adjustment made by management. It may be temporary.
Since releasing its report, the ASX real estate share has dropped nearly 3% from its high of $6.35 at the start of the week.
The impairments are part of Lendlease's efforts to streamline operations and refocus on its core areas, such as its Australian development pipeline.
Despite the significant losses, Lendlease did report some positive results.
It booked a 23% increase in pre-tax income to $669 million and a 2% rise in after-tax operating profit.
The company also maintained its full-year distribution at 16 cents per share.
Looking forward, Lendlease plans to sell $1.9 billion in assets as part of a broader $2.8 billion sales target for FY25.
