Cash rate cuts present favourable conditions for REITs rebound

The Reserve Bank of Australia’s (RBA’s) policy easing cycle has set the stage for a real estate investment trust (REIT) comeback as investors look to other sources for reliable income, according to specialist SG Hiscock & Company (SGH).

Grant Berry, SGH portfolio manager, said the demand for REITs in Australia has returned due to a combination of population growth, heightened construction costs and economic uncertainty – resulting in less supply.

“While we see increasing downside risks for economic growth in Australia and offshore, there are still supportive tailwinds for the REIT sector. Population growth is robust, and forecast to continue,” he said.

“Research from CBRE has forecasted that the Australian population will rise to 32 million by 2035, which represents an increase of 4.5 million people over next 10 years.

“Population growth ultimately drives occupancy demand for property. In Australia, the growth is much greater than most other developed nations, and that growth will help to support the demand for Australian commercial property.

“In particular, greater population numbers will raise the need for hospitals, housing, logistics facilities, and we will also need more retail and office space. The CBRE research shows that with each additional 1 million increase in the population, it will require 4,500,000 square metres for logistics, 800,000 square metres for retail, 800,000 square metres for office and 420,000 new residential dwellings. These are all significant numbers.”

Berry said the ongoing supply issues plaguing the real estate sector – due to land restrictions, associated planning or high constructions costs – have produced an “interesting” dynamic, where strong demand and low supply drive the investment case for existing quality real estate opportunities.

“It is a challenge to supply retail spaces, as the associated planning and costs to build on land in urban locations is proving difficult,” he said.

“In the office space, planning and supply is easier given the vertical nature of office buildings. However, vacancy rates are elevated, and construction costs have risen in the order of 40 per cent in recent years. Hence not much supply there.

“In the industrial and logistics space, there is more supply and while there are areas that are more challenging, such as infill locations, we did in fact have a record year of supply in 2024. Which is why we prefer retail and office.  

“On top of all of this, lower quality assets can be withdrawn from the market for alternative uses such as old office buildings converted to residential.”

Berry also highlighted the favourable conditions contributing to attractive dividends from the real estate sector, amid falling bond yields and healthy credit spreads.

“Bond yields for valuation metrics, that is nominal bond yields, feed into discount rates and inflation linked bonds (real bonds), which we believe have relevance to capitalisation rates and property yields. Both are currently elevated in a post GFC context. If property is priced with reference to this, it sets up the asset class for good long-term returns,” he said.

“Investing in an Australian REIT can help investors diversify, have exposure to high quality assets and lower transaction costs without buying actual property. Investors gain exposure to different property sectors and real estate assets and such diversification is hard to achieve by investing directly in commercial property given the significant costs and scale involved.”