Australian REIT sector outlook: Rebound ahead

What’s driving renewed investor interest in the Australian REIT sector? From macroeconomic shifts to structural tailwinds, SG Hiscock’s Grant Berry sets the scene.

Falling official interest rates mean investors are starved of income, and real estate investment trusts (REITs) offer the opportunity to access reliable income and capital gains. The current cycle of official interest rate cuts is a positive for REITs, according to Grant Berry, portfolio manager of the SGH Property Income Fund.

Contributing to this within Australia is the high demand from population growth, coupled with elevated construction costs and economic uncertainty. This leads to less supply, which is all supporting returns from REITs, he says.

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

Population growth drives property demand

“The Australian Bureau of Statistics has forecasted that the Australian population will rise to 32 million by 2035. This represents a 4.5 million-person increase over the next 10 years.

“Population growth ultimately drives occupancy demand for property. In Australia, growth is significantly greater than in most other developed nations. This growth will help support the demand for Australian commercial property.

“In particular, greater population numbers will raise the need for hospitals, housing, and logistics facilities. 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. It will also require 800,000 square metres for retail, 800,000 square metres for office and 420,000 new residential dwellings. These are all significant numbers,” he says.

Supply constraints support asset values

The supply dynamics are also an interesting aspect. Bringing on supply is challenging in many subsectors due to land constraints, associated planning, or economics resulting from elevated construction costs. Strong demand and low levels of new supply support the investment case for existing quality real estate. According to Mr Berry, retail spaces are a challenge, and vacancy rates in offices are slowing down supply.

“It is a challenge to supply retail spaces, as the associated planning and costs to build on land in urban locations is proving difficult. 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 by approximately 40 per cent in recent years. Hence, there is not much supply there. In the industrial and logistics space, there is more supply, and while certain areas, such as infill locations, are more challenging, we did 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,” he says.

Favourable conditions for commercial property investment

Further interest rate cuts and government policy are additional tailwinds for the residential subsector. Mr Berry says that a relatively good regulatory environment and corporate governance in Australia are favourable for commercial property investment from an international perspective, with a low Australian dollar being a potential attraction.

Meanwhile, falling bond yields and healthy credit spreads make the real estate sector’s distribution payments more appealing. These securities have historically paid higher distribution yields than other equity classes. They offer an alternative source of potential income, according to Mr Berry.

“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 the property is priced with reference to this, it sets up the asset class for good long-term returns.”

Diversification and long-term income through the Australian REIT sector

“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,” Mr Berry says.

For more information about the SGH Property Income Fund, click HERE. Follow us on LinkedIn for regular market insights and fund updates.

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Disclaimer

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