Office property: a large discount, but is it an opportunity?

I've been revisiting an area of the Australian property market that most investors seem quite happy to avoid.

Office buildings.

More specifically, the enormous discounts some ASX-listed office property trusts are trading at relative to their reported net tangible assets.

Take Centuria Office REIT (ASX: COF).

Its most recently reported NTA was $1.66 per unit. On 13 October, the market price was around 85 cents.

That's a discount of almost 49%.

Now, I wouldn't suggest for a moment that this automatically makes it cheap.

Property valuations can be wrong. Office buildings require ongoing capital expenditure.

Tenants have choices, financing costs matter, and debt can magnify the consequences when things don't go according to plan.

But I wanted to understand how unusual this discount really is.

So I've been going back through the history of Australian listed office trusts, including Commonwealth Property Office Fund, Investa Office Fund and Charter Hall Office REIT, with records extending into the 1990s.

What becomes clear is that the listed market and underlying property valuations don't always move together.

And sometimes the sharemarket adjusts well ahead of the physical property market. That's what makes the current situation interesting.

COF has reported improving leasing activity, some positive property revaluations and the sale of an office building above its book valuation.

Yet its units are trading at a substantial discount to reported NTA.

My broader thinking about property remains heavily influenced by the long-term property and credit cycle research of Property Sharemarket Economics. I still see reasons to be cautious about the broader cycle.

But could office property be experiencing its own counter-cyclical opportunity within that bigger picture?

Possibly.

The downturn has been going on for roughly four years, although the historical evidence doesn't yet establish that four years is some reliable turning point.

For me, the interesting question isn't simply whether the discount is large.

It's whether the underlying fundamentals are beginning to improve while the listed market is still pricing in a much worse outcome.

That's the question I'm researching.

General market commentary only, not personal financial advice.