BLUEPRINT: Dexus midnight runners

When one of the world’s largest pension funds, Canada Pension Plan Investment Board (CPPIB), decided to test the waters in Australia’s real estate market in 2008, it selected a mid-size manager, DEXUS Property Group, as its partner.

It might have seemed an unlikely decision to outsiders as CPPIB bought A$200 million ($155 million) worth of units in the DEXUS Diversified Wholesale Fund (DWPF), an open-ended unlisted property fund with investments in core Australian office, industrial and retail properties as a first step in formulating a long-term plan to cracking Australia. But the relatively modest investment was just the start. Five years after that initial dipping of the toe in the water, CPPIB and DEXUS teamed up to take over Commonwealth Office Property Fund (CPA), a specialist owner of officer towers in Australian capital cities from Commonwealth Bank of Australia.

 This giant A$3.8 billion piece of corporate sizzle was CPPIB’s largest Australian investment to date, following which DEXUS suddenly commanded 25 per cent of all office skyscrapers in Sydney’s central business district and 11 per cent of Melbourne’s high-rise office blocks. 

Indeed, DEXUS has now become Australia’s largest listed office landlord thanks to its partnership with CPPIB and, as such, has joined a small coterie of Australia’s listed REITs that can be labelled as partner of choice for several overseas institutional investors seeking a foothold in the country.  

Apart from CPPIB, DEXUS’ 49-strong roll call of investor partners is impressive and includes South Korea’s National Pension Service and Future Fund of Australia, and it is said other global funds are waiting in the wings hoping to use DEXUS as their point of entry to the tightly-held market. 

In an interview, Darren Steinberg, chief executive officer who joined in 2012 from Colonial First State Global Asset Management, and Craig Mitchell, chief operating officer, says that his team is constantly fielding enquiries from potential investors, particularly from Asia.

It has been quite the turnaround for this company that overextended overseas prior to the financial crisis. Since coming on board in 2012, Steinberg and DEXUS has now sold all of its US and European assets and the mission is to focus purely domestically. 

Steinberg and Mitchell say fund management is the fastest-growing arm of DEXUS’ three core businesses, the other two being property asset management and property trading, and that their aim is to build a recurring stream of income to the group by providing a bridge for institutional investors to reach into Australia. “Today, 90 per cent of our earnings come from core assets, and 10 per cent from other businesses – trading and funds management. We’ve said that if all our strategies are really successful, the ratio will probably end up 80-20,” explains Steinberg. 

To do this, Steinberg has set about changing the personality of what was previously described as a ‘sleepy REIT’ seemingly stuck in a rut, to a manager of strength in terms of size and economies of scale.

Size is important in the equation and, soon after he arrived at DEXUS, Steinberg mapped out a five-year strategy to transform the company into a bigger entity. Understandably, acquisitions formed part of that strategy. 

“We are (now) of a sufficient size to give us good economies of scale to operate the business. An indicator of this is our management expense ratio, which has fallen from 0.65 per cent three years ago to below 0.45 per cent,” says Steinberg.

He also wants DEXUS to be seen as “a pure Australian play”, focusing on Australia and Australia alone, undistracted by overseas investments. 

In his career spanning more than 20 years in three of Australia’s largest property groups, Steinberg has shown an aversion to offshore expansion. 

Like other listed Australian REITs, DEXUS expanded overseas in the mid-2000s and the global financial crisis revealed flaws in these overseas strategies. 

At the peak of the market, in 2008, the DEXUS US portfolio was valued at $1.557 billion – and its European industrial assets at €160 million. These assets shed 29 and 35 per cent in value respectively during the downturn before recovering gradually in later years. It needed to sell in order to reduce debt.

DEXUS has now completed its reweighting back to Australia. The largest exit was the sale in 2012 of a portfolio of 65 industrial assets for $770 million to The Blackstone Group.

Following this homeland refocus, the core DEXUS strategy can be distilled into two simple goals – delivering 3 to 5 per cent earnings growth and 9 to 10 per cent total return to investors each year. 

In speaking with Steinberg and Mitchell it is clear they are under no illusion that capital will stay with DEXUS only if the manager delivers. They understand that, ultimately, DEXUS will be judged by the quality of returns to its investors, but they both seem confident. “Our returns have consistently been among the top quartile (among Australian managers),” says Mitchell. DWPF has delivered an average return of 8.94 per cent over five years, 9.16 per cent over three years and 9.26 per cent over one year. In all instances, it was ahead of industry benchmarks. The listed vehicle delivered total returns of 35.6 per cent to investors in the year to end of January 2015, add the pair, which compares favorably to the Australian REIT (A-REIT) sector across the board as it managed an average 27 percent total return in 2014. This is turn was much better than the broader Australian equities market, which gave just below 6 percent says Adam Fairfax, executive director, REIT & equity research sales at JP Morgan. He says DEXUS’ performance has been achieved in a difficult market and a slowing economy, pointing out that the state of the office market in Australia continues to be a challenge for landlords.

Deal junkie 

Rightly or wrongly, Steinberg has earned the moniker of “deal junkie” for his adroit moves in clinching deals, whether these be by way of a takeover or by seizing prime assets before they hit the open market. “I am allegedly a dealmaker,” says Steinberg. “(But) I am patient. We are a patient organization because we can afford to be patient in an environment such as it is today,” he says.

Certainly, he is a man of quiet determination as a veteran of some of Australia’s largest property deals over two decades. And he has behind him what has been described as one of the finest capital market teams among Australian REITs, plus a strong board and eager capital partners.

Winston Sammut, managing director of Folkestone Maxim Asset Management, says Steinberg has good back-up in his senior management team. “He gives them space and they deliver. Mind you, they had a lot on their plate after the CPA acquisition,” he opines.

“The real focus for DEXUS now is driving the underlying real estate a lot harder than we have been driving it in the past through stronger and more proactive leasing,” explains Steinberg. 


With the Australian economy slowing, and increasing global uncertainties, Steinberg and his team face a big challenge ahead in maintaining their performance. Australia’s biggest listed landlord has to deal with a rental market that seems stubbornly stuck in neutral. Expectations of a rental market recovery have evaporated each year, much to the disappointment of investors. The forecast is again for flat rental growth in the current financial year. 

Fortunately, investors like CPPIB’s head of global real estate, Graeme Eadie are sanguine. Because investments such as the CPA commitment are long-dated, they will take “multiple years” to prove themselves, says Eadie. “I do not expect an immediate turnaround. I would love that, but it never happens,” he told PERE.

Eadie adds: “You have to remember that a lot of things going on in the world keep shifting and shaping the market. But we still think Australia is attractive. A considerable amount of foreign investment continues to flow into the country.”

He tells PERE that the initial DWPF investment had provided good exposure to the Australian market, enabling CPPIB to move up the learning curve. Speaking about the initial investment with DEXUS back in 2008, he says: “It really got us started in Australia and allowed us to formulate our longer-term views”.

For the takeover of CPA, Eadie also recalls there were a number of different components leading to the decision to pursue corporate activity. “First, we thought the office market was starting to change and improve, particularly in Sydney and Melbourne, where most of the portfolio was located. We thought we could acquire the assets at a reasonable price to give us significant scale,” reveals the real estate head. Eadie also felt that the DEXUS team had “some good ideas” on how to optimize the portfolio and to maximize its value over the long term. “When we put all those things together, we had a very attractive investment,” he sums up. 

Though clearly having success, DEXUS still takes the need to keep its competition at bay seriously. It has to work within a competitive market after all. Nevertheless, it has been able to reduce incentives offered to tenants, down to an average of 18.5 per cent compared to the industry average of 25 to 35 per cent. Investors also credit Steinberg’s leadership in making office leases more transparent, rectifying what has been described as a peculiarly Australian practice of opaque incentive arrangements with tenants. 

Steinberg is also described as one of the most approachable chief executive officers in the Australian property sector and he insists growth will come from DEXUS’ existing businesses.

For Steinberg, his mantra to his troops is to be proactive, creative and vigilant. Each working week kicks off with a leasing meeting, lasting up to two hours, where Steinberg quizzes his senior managers on the latest status of leasing across the group’s real estate portfolio. Says Steinberg: “We look at whether we are getting leasing deals done in a timely manner, how we might maximize a deal, and, if space is sticky, whether we have priced rents at the right level.” Steinberg and Mitchell will directly intervene, where necessary, to bring a big leasing deal across the line. “We don’t do it for every deal, but if you’re talking annual rentals worth A$10 or A$20 million, then you would want to leverage your relationship at board or senior management level to close,” says Mitchell. “We think it is worth a phone call and a conversation for a deal of that size.” 

The company is also being more innovative, bringing so-called city retail to its premium office buildings and leasing the foyers of its buildings to a café operator, or to car companies wanting to display their products. The Italian manufacturer, Maserati, for instance recently took advantage of an opportunity to display its cars and to offer them for test drives to office workers in two DEXUS buildings in Sydney.

Value adding 

DEXUS has a special team looking at how to enhance the shopping precincts at three of its highest-profile buildings in Sydney’s central business district; Gateway, Grosvenor Place and Australia Square. The group is weeding out older office buildings for conversion to other uses, including residential apartments. “We have strong real estate DNA in this company and the skills to maximize the use of our real estate,” insists Steinberg.

Adds Mitchell: “We are looking at our entire portfolio to see where there is demand for a change of use from industrial to residential, from industrial to bulky goods, from industrial to retail or from office to residential. DEXUS had two industrial assets in South Sydney on its books at a$90 million. It sold these for a$190 million after obtaining rezoning and redevelopment approvals for residential towers. The maximum dollar is created with minimal risks in getting planning and development approvals.

Even though DEXUS has an experienced team of residential developers, Steinberg says it is unlikely to go into residential projects in its own right. It also jointly owns seven large shopping centers with SCentre Group, Australia’s largest retail REIT. The portfolio, owned on a 50-50 basis, was valued at A$4.7 billion last year. “DEXUS has been in retail for over 20 years,” highlights Steinberg. “We have a team of 100 people in our shopping Centre business.” Retail assets are managed on behalf of DEXUS investors in its unlisted funds. 


Earnings and growth will also come from DEXUS’ development pipeline across the office and industrial sectors on the balance sheet, and from the office, industry and retail sectors in its third party funds management business. “We have a development pipeline to generate organic growth across our listed and unlisted platforms,” says Mitchell. On completion of these developments, A$3.5 billion-worth of new assets at December 31, 2014 will take total funds under management to more than A$21 billion.

In addition to all this, DEXUS runs a separate trading unit as distinct from asset recycling, from which it expects to make a profit of A$40 million this year, and has flagged approximately A$90 million in pre-tax trading profits for the next two financial years.

It all means that the company is changing. Steinberg is satisfied that, under his watch, DEXUS is slowly maturing into the role of a serious global fund manager. “We achieved our five year plan in three years, so we are very happy with the way things are going.” 

Then, as an aside, he adds: “But there is still plenty of work to do to take the company to where we want it to go in the next few years.” 


Dexus Property Group

HQ: Sydney 

Number of offices: 61 

Chief executive officer: Darren Steinberg

Chief operating office: Craig Mitchell

Chief investment officer, Capital Partners:  Graham Pearson

Number of employees:  289

Total value of assets under management:  A$18.3 billion 

Total Third Party Funds under management:  A$9.1 billion


Any fix for deal junkie?

Will DEXUS Property Group take over or merge with Australia’s oldest diversified REIT, GPT Group, to create an A$25 billion company – Australia’s second largest listed REIT? There has been speculation for a while now, and a takeover would double DEXUS third party funds under management to almost A$19 billion. Such an acquisition would present a rare opportunity for large investors alongside DEXUS to secure a portfolio of critical mass in Australia’s tightly-held market. Certainly, sovereign wealth funds and global pension funds have played an important role in taking over and privatizing listed Australian companies in the past five years, so experts are getting animated. 

So far, both GPT and DEXUS have denied there is substance to rumors. But speculation continues in the Australian media and among stock analysts, especially now that the whole of the A-REIT sector appears to be embracing a consolidation phase, originally started by DEXUS with its takeover of Commonwealth Property Office Fund (CPA). 

One source told PERE he had heard that discussions between DEXUS and GPT resumed in November. However, DEXUS Chief executive Darren Steinberg flatly denies any active negotiations. He says: “We are not talking to GPT,” before adding with a smile: “Maybe GPT wants to take us over.” Fund managers told PERE that Steinberg is remembered for keeping his intentions to take over CPA close to his chest right up until he notified the Australian Securities Exchange. Those who know Steinberg well also say that, having bedded down his CPA takeover, he will be on the lookout for other acquisitions or a merger.

“We believe DEXUS is likely to remain active on the acquisition front, and a tie-up with GPT is possible,” says Paul Checchin, head of research at Macquarie Research, in a recent note. 

“We believe Dexus would be interested in GPT’s retail exposure, in addition to likely synergy across the office portfolios.” Adam Fairfax, executive director, REIT & equity research (sales) at JP Morgan agrees: “It could be a perfect fit. Steinberg wants more office in its portfolio and a bigger funds management platform. GPT has both.” Luke Sullivan, senior vice president of leading global investment manager, Cohen & Steers, adds: “There are a lot of chief executives with a lot of ambition within the Australian property industry. Whether a deal makes sense is time-specific, and depends on the metrics. GPT per se is a company that has come back from the brink over the last five years. It does some things very well, others not so well. There is immense synergy that could come from a tie-up, but it is hard to know how that might be structured without a deal being before us.”