Dexus (ASX:DXS) lost the legal fight with Australia Pacific Airports, owner of Melbourne and Launceston Airports. It is being forced to sell the 27% stake in APAC that its infrastructure funds hold (together, the Dexus Bloc) back to APAC’s co-owners.

Why it matters: APAC-related management fees are about $15 million after tax, or 3% of Dexus’ fiscal 2026 expected adjusted funds from operations. But the court ruling carries more costly ramifications: a tarnished brand, broken trust, and expensive legal bills.

  • Its original plan was to retain control of the Bloc and keep collecting management fees, but it was found to have breached commercial confidentiality while trying to find buyers for some of the Bloc shares. Dexus has agreed to cover the legal costs for clients wishing to appeal.
  • With the loss of APAC, which represents around 10% of Dexus’ $36 billion third-party funds under management, and bruised reputation, we lower our FUM growth assumption over the next decade to 2% per year, from 4% previously.

The bottom line: In addition to slower FUM growth forecasts, we increase our cost-of-capital assumption by 20 basis points to 7.2%, given Dexus’s heavy office exposure and the higher risk premium we now assume for offices relative to retail and industrial properties.

  • These changes result in a 10% reduction in our fair value estimate for no-moat Dexus to $8.50. We still think investors are overly bearish on Dexus, pricing a nearly 40% discount to its $8.95 per security net tangible assets and ascribing no value to its funds management business.
  • The discount to NTA is, in our view, too harsh for a high-quality office portfolio and relative to peers’ discounts.

Coming up: We expect fiscal 2027 distributions to be cut moderately, with lower trading profits and funds management income, and higher debt costs. Nonetheless, at the current price, the 2027 yield is an attractive 6.5%, and distribution growth should resume in the medium term.

Dexus loses its airport boarding pass

Diversification has been at the forefront of Dexus’ strategy in recent years. Once Australia’s largest office landlord, Dexus is shifting focus to managing third-party assets rather than having investment properties on its own balance sheet. Dexus has a record of selling stakes in assets into funds management vehicles. Dexus’ third-party funds under management grew substantially over the last five years, to $36 billion at the end of December 2025, largely thanks to the acquisition of AMP Capital’s domestic real estate and infrastructure platform in 2023. The funds platform was subsequently hit by property devaluations due to higher interest rates and a slew of large investor redemptions. The recent Melbourne Airport debacle is another setback. We expect FUM to shrink in the near to medium term before rising again.

Dexus has sensibly scaled back its development pipeline in recent times due to elevated interest rates and construction costs. As of December 2025, Dexus had two office developments: Atlassian Central, Sydney and Waterfront Brisbane. Atlassian Central is due for completion in late 2026, and Dexus hopes to sell down partial stakes to investors. Dexus committed to the project back in fiscal 2022, when interest rates were considerably lower, with an expected yield on cost of just 4%-4.5%. Dexus has no leasing risk, as the building has been 100% preleased to Atlassian for 15 years. However, we suspect it will have to take a loss when selling it in the current environment.

Despite the persistent weakness in office leasing, Dexus has maintained above-market office occupancy. This is partly because of its skew to Sydney, where the office market is stronger than other large capital cities (Melbourne in particular). Moreover, Dexus intentionally manages a diverse tenant base and maintains a staggered lease expiration profile. Compared with many of its peers, Dexus has a significantly lower exposure to large corporate tenants. This means income volatility is relatively benign in terms of tenant turnovers. The REIT also targets a maximum of 13% office expirations in any one year, which ensures relatively stable and visible income streams.

Bulls say

  • While hybrid working has set office recovery back, Dexus has large exposure to Sydney, where office market conditions are the strongest of all Australian capital cities.
  • Strong population growth and rising e-commerce boost demand for Dexus’ industrial portfolio. This allows high-quality sites to achieve more rent bargaining power.
  • Dexus’ funds management vehicles are attracting investor inflows, given their scale, strong track records, and management expertise.

Bears say

  • Capitalization rates are still likely have further to rise before stabilizing, given current bond yields.
  • Office occupancy has been hurt by structural threats from hybrid working. The demand is also sensitive to business conditions and market sentiment.
  • Industrial property has benefited from several years of tight supply, and rents have increased dramatically. There is a limit to how much more rents can grow as tenants may not be able to keep paying higher rents if productivity is not going up at the same pace.

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