Charter Hall Group (ASX: CHC) is an integrated property group deriving income from two earnings streams. The first is investment income from direct property jointly owned with other capital partners. The second is funds management earnings. Approximately 60% of total income comes from property ownership and 40% from the funds management division.
Investments are spread over the office, retail and industrial sectors with a bias towards office. In total Charter Hall manages over 900 properties on behalf of institutional, wholesale and retail investors. 'Look through' gearing is 35%. FY 2014 earnings are estimated to be 26c per security including a 22c distribution; placing this property group on a 5.5% unfranked yield. Charter Hall has established a good record of increasing distributions and improving property values. This trend looks likely to continue and Charter Hall is a secure entry into a diverse commercial property portfolio.
Dexus Property Group (ASX: DXS) is well established, having been around for 33 years. The directly owned portfolio is heavily skewed towards offices (82%), with the remaining 18% being industrial. With the office buildings 87% are classified as prime grade and these alone represent 82% of the balance sheet. Most assets are located in the CBDs of Melbourne and Sydney. Commercial property experts are predicting a steady increase in rental growth for primary CBD offices and Dexus is well positioned here. The successful 100% takeover of Commonwealth Property Office Fund (now finalised) will add $3.3b in funds under management and a further 21 well situated office properties.
Following this takeover the debt / equity ratio is 47% and some rationalisation of assets can be expected in the shorter term. Cost of debt is 5.7% with an average duration of six years. With net tangible asset backing of $1.06, Dexus yields 6% on 2014 estimates. Possessing a high-quality property portfolio Dexus is a conservative investment with good prospects for medium-term growth in both asset values and income.
Foolish takeaway
With increasing interest from large institutions and private investors well located commercial property looks set for a revival over the medium term. At current prices Charter Hall ($4.03) and Dexus ($1.05) would suit investors looking for a reliable and growing income stream coupled with moderate asset growth prospects.
