Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 485

Are A-REITs set for a comeback?

Australian Real Estate Investment Trusts (A-REITs) have been hit hard by this year’s sell off, underperforming the market by over 18%. But while REITs are down, they are not yet out. The REITs’ rough run has mainly been driven by a sharp increase in the 10-year bond yield, which has more than doubled. However, we believe long dated government bond yields could be close to reaching their peak, and with the Reserve Bank of Australia (RBA) prioritising growth over inflation, this could provide a tailwind for REIT performance in 2023.

The RBA has started to temper the rate of cash rate increases over the past two months despite Australian inflation reaching a 40-year high in Q3 and expectations it will further increase in Q4 2022. The RBA increased the cash rate in October and November by 25 basis points, below market expectations of 50 basis point hikes on both occasions.

This approach indicates that for 2023 the RBA is prioritising economic growth over containing inflation quickly. RBA increased their Australian CPI forecast for 2023 from 2.75% to 4.75% over the past four quarters. In contrast, the US Federal Reserve (Fed) is resolute in driving down inflation to 2% despite its actions increasing the risk of a US recession ‘hard landing’.

The RBA’s focus is positive for potentially oversold A-REITs for 3 reasons.

1. REIT income is inflation linked

REITs historically outperform during persistent inflation periods. The RBA is forecasting inflation to be above its target in 2023.

Central bank forecasts for inflation and GDP growth in 2023

Source: RBA, Federal Reserve

Commercial leases and contracts in office and logistics typically have inflation-linked annual increases in rents written into the contract, providing inflation protection on income. Take for example the period between the end of the dot-com bubble and Global Financial Crisis. During these years, Australian CPI year-on-year was 2.9% on average and Australian 10-year government bond yields steadily increased over this time where Australian REITs as represented by S&P/ASX 200 A-REITs outperformed S&P/ASX 200 by 3.99% between 1 January 2002 and 31 December 2006.

2. In the case of peaking rates, pivot to A-REITS

REIT performance is negatively correlated with bond yield movements due to the change in borrowing costs impacting property valuations. The increase in government bond yields year to date, due to rapid increases in the expected RBA cash terminal rate has been a major headwind for REIT performance.

A-REITs performance relative to S&PASX 200 versus Australian government 10-year bond yield

Source: Bloomberg, Out/Underperformance as MVIS Australia A-REIT cumulative performance relative to S&P/ASX 200. Past performance is not indicative of future results.

However, long dated government bond yields could be close to reaching their peak. Broker consensus is Australian Government bond 10-year yield will remain at similar levels over the next two years. Bond markets have priced in expected further RBA cash rate increases and there is a chance the RBA starts cutting the cash rate in late 2023 as the global economy slows, putting downward pressure on government yields.

If yields fall, this would be a tailwind for REIT performance. 

3. Attractive valuations

The asset deflation bear market we have seen year to date has improved the valuation profile of REITs. Price to Adjusted Funds from Operations (AFFO multiple) is at a 9-year low and price to net tangible assets (NTA) is at a 15% discount. These measures are preferred to metrics such as price-to-earnings ratios when it comes to REITs. 

A-REIT AFFO Multiple

Source: Bloomberg, A-REIT as MVIS Australia A-REIT Index

A-REIT Price to NTA

Source: Bloomberg, A-REIT as MVIS Australia A-REIT Index

VanEck favours the outlook of industrial REITs such as Goodman Group and Centuria. We anticipate cap rates and net operating income to remain sticky as tenants manage excess inventory levels and expand e-commerce channels amid low vacancy rates. Retailers will continue to invest in optimising delivery chains as they address demand for both in-store and online consumer spending. Warehousing provided by industrial REITs will be key beneficiaries.

VanEck is cautious on Retail REITs including Scentre group and Vicinity Centres. Rapid RBA cash rate increases have yet to shift consumer spending patterns. Retail sales year-on-year growth is almost 7 times pre-COVID trends (2017-2019) which is not sustainable in a higher inflation and rates environment. These REITs will come under pressure when retail spending decelerates.

 

Cameron McCormack is a Portfolio Manager at VanEck Investments Limited, a sponsor of Firstlinks. This is general information only and does not take into account any person’s financial objectives, situation or needs. Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.

For more articles and papers from VanEck, click here.

 

RELATED ARTICLES

The RBA deserves kudos for a job well done

This 'forgotten' inflation indicator signals better times ahead

This vital yet "forgotten" indicator of inflation holds good news

banner

Most viewed in recent weeks

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement income expectations hit new highs

Younger Australians think they’ll need $100k a year in retirement - nearly double what current retirees spend. Expectations are rising fast, but are they realistic or just another case of lifestyle inflation?

Welcome to Firstlinks Edition 627 with weekend update

This week, I got the news that my mother has dementia. It came shortly after my father received the same diagnosis. This is a meditation on getting old and my regrets in not getting my parents’ affairs in order sooner.

  • 4 September 2025

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Why super returns may be heading lower

Five mega trends point to risks of a more inflation prone and lower growth environment. This, along with rich market valuations, should constrain medium term superannuation returns to around 5% per annum.

Super crosses the retirement Rubicon

Australia's superannuation system faces a 'Rubicon' moment, a turning point where the focus is shifting from accumulation phase to retirement readiness, but unfortunately, many funds are not rising to the challenge.

Latest Updates

Investment strategies

Why I dislike dividend stocks

If you need income then buying dividend stocks makes perfect sense. But if you don’t then it makes little sense because it’s likely to limit building real wealth. Here’s what you should do instead.

Superannuation

Meg on SMSFs: Indexation of Division 296 tax isn't enough

Labor is reviewing the $3 million super tax's most contentious aspects: lack of indexation and the tax on unrealised gains. Those fighting for change shouldn’t just settle for indexation of the threshold.

Shares

Will ASX dividends rise over the next 12 months?

Market forecasts for ASX dividend yields are at a 30-year low amid fears about the economy and the capacity for banks and resource companies to pay higher dividends. This pessimism seems overdone.

Shares

Expensive market valuations may make sense

World share markets seem toppy at first glance, though digging deeper reveals important nuances. While the top 2% of stocks are pricey, they're also growing faster, and the remaining 98% are inexpensive versus history.

Fixed interest

The end of the strong US dollar cycle

The US dollar’s overvaluation, weaker fundamentals, and crowded positioning point to further downside. Diversifying into non-US equities and emerging market debt may offer opportunities for global investors.

Investment strategies

Today’s case for floating rate notes

Market volatility and uncertainty in 2025 prompt the need for a diversified portfolio. Floating Rate Notes offer stability, income, and protection against interest rate risks, making them a valuable investment option.

Strategy

Breaking down recent footy finals by the numbers

In a first, 2025 saw AFL and NRL minor premiers both go out in straight sets. AFL data suggests the pre-finals bye is weakening the stranglehold of top-4 sides more than ever before.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.