Bunnings warehouse values holding firm: BWP Trust
Bunnings warehouses are still highly sought after by private investors.

Bunnings warehouse values holding firm: BWP Trust

Bunnings warehouses are holding their value in the face of rising interest rates in part due to strong private investor demand and limited supply, according to the country’s biggest owner of these large-format retail properties, ASX-listed BWP Trust.

While the $3 billion landlord is dealing with challenges of its own, including rising construction costs on vacated stores it is redeveloping and an inability to find suitable Bunnings acquisitions to grow its portfolio, the trust bucked the write-downs being reported by other real estate investment trusts over six months to December.

After the entire portfolio was revalued during the half year – 16 by independent valuers and 57 by company directors – the trust booked a $54 million valuation gain following a pick-up in rental growth and no change in capitalisation rates or investment yields, which remained just above 5 per cent.

This was in sharp contrast to half-year results reported on Tuesday by shopping mall landlord Region Group, which revealed almost $150 million of writedowns as cap rates rose across its portfolio rose 23 basis points to 5.67 per cent.

In the industrial sector, Centurial Industrial REIT booked $93 million of write-downs over the half year as cap rates rose 47 basis points to 4.66 per cent across its portfolio.

BWP managing director Michael Wedgwood defended the latest valuations and cap rates, saying these were affirmed by independent valuers, and it maintained a consistent approach to valuations, regardless of whether the market was going up or down.

Mr Wedgwood added there was also no market evidence to support any change in valuations after no Bunnings changed hands over the half year.

The last Bunnings to sell was a new store in Mt Isa, Queensland, which sold at auction in May for $16.2 million on a tight 4.29 per cent yield.

“There is still strong interest in Bunnings warehouses from private investors in the event anything comes to market,” Mr Wedgwood said.

However, he said it was difficult to know where cap rates and valuations might be heading.

“We’re seeing different things occurring across different sectors, and it will take time to adjust [in our market] and it will require some transaction activity,” Mr Wedgwood said.

Of the 16 BWP properties independently valued, 10 booked small gains, two were unchanged and four recorded small falls.

“Any increases in valuations was driven by rent increases,” Mr Wedgwood said.

Operationally, BWP benefited from 23 of its properties have rental increased indexed to inflation, resulted in a 6.1 per cent weighted average increase in rents across these assets.

This helped generate like-for-like rental growth of 3.9 per cent for the 12 months to December 31, up from 3.3 per cent annual growth reported at the end of June last year.

This lifted total income by 3.6 per cent to $78.6 million, offsetting a 4 per cent rise in finance costs as the trust’s weighted average cost of debt rose due to higher interest rates.

The net result, when including a $600,000 contribution from its income reserve, was that distributable income was unchanged at $57.9 million, equating to 9.02¢ per security.

The full-year distribution was forecast to be “similar” to last financial year’s 18.29¢ per unit.

In a note following the release of its half-year results, UBS analysts Tom Boder, Grant McCasker and Cody Shields said the trust’s weighted average lease expiry (WALE) – down to 3.6 years from 3.9 years six months ago – and looming lease expiries (more than 75 per cent of Bunnings leases are due to expire between July 2023 and June 2027) “remain a concern”.

Of the 73 properties owned by the trust, only about 60 are leased to Bunnings, five have been redeveloped or repositioned (and re-leased) and eight are going through a redevelopment process due to Bunnings vacating these premises at the end of their leases.

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