Struggling A-REITs Face New Test as Property Sectors Diverge

In a poor showing for the most recent financial year, a downturn in the first half of 2026 meant A-REITs underperformed property and stock markets more broadly. The lagging returns from Australian real estate investment trusts are not necessarily reflective of the values or yields of the assets they hold, but experts are unwilling to predict growth in A-REIT prices. MSCI research and development executive director Ben Martin-Henry tells The Urban Developer that “most A-REITs are trading at significant discounts to net tangible assets at the moment”. “They have been for quite some time. Which is why you get a lot of the CEOs saying ‘buy our shares’,” Martin-Henry says. Rainmaker Information associate director of research Camille Schmidt says that the S&amp;P/ASX 200 A-REIT index declined by 2.2 over the financial year. Many international property funds, by comparison, returned 15 per cent or more. “They’re not as concentrated as the Australian market, and they’ve also got more exposure to these growth themes that have also benefited the broader global equity markets,” Schmidt says. According to Schmidt, US-focused funds particularly benefit from “healthcare real estate being driven by aging populations”. “Industrial and logistics property; there’s drop-shipping, e-commerce providing support there. And then residential property as well, in terms of rental housing REITs, performed strongly where there’s been housing shortages.” ▲ Australian-focused funds are running well behind their counterparts holding international property, despite Aussie dollar appreciation. Australian indices tend to be particularly narrow, with Goodman often running at close to 40 per cent weighting. Other significant players such as Scentre and Vicinity can also skew index results, if sectoral trends are having an impact on larger focused funds. At MSCI, the Australia Listed 300—REITs Subset Index returned 10.41 per cent for the 2025 calendar year, slightly edging the broader market. However, 2026 has proven harder on the property funds and Martin-Henry says a mixture of narratives is emerging. “Looking at the overall index is quite misleading, just because the three core sectors are moving different ways, and healthcare is obviously still getting smashed too,” Martin-Henry says. “Office is still terrible. I think offices in general are down about 22 points in the year, whereas retail and industrial are starting to pick up.” Property trends playing a role Recent upheaval in Australian property markets will also be affecting REITs, although the impacts are nebulous. Martin-Henry says that hypotheses of small-scale property investors shifting to commercial assets may be overstated. “We’re definitely seeing money shift away from the residential sector. I wouldn’t be surprised to see an increase in acquisition of shares in REITs,” Martin-Henry says. ▲ Mum-and-dad investors may struggle to pivot to commercial or industrial property directly. “You can gear a resi asset up to 80 per cent, but trying to gear a commercial asset to that level—good luck. “Most of the loan-to-value ratios are incredibly low at the moment, compared to their historic levels. If the entry point is much higher, it will mean that people will go into more retail funds and more REITs as well. “Thirty bucks a share is a lot cheaper than $3 million for a shed, so [A-REITs] are a way for mum-and-dad investors to tap into other property sectors.” Cyclical or structural shifts in property can also point to where REITs might go. Despite the post-Covid boom in self-storage, for example, funds targeting that sector only make up 0.31 per cent of MSCI’s index. Institutional residential and healthcare are also areas to watch. “We talk about self storage being an alternative in Australia, but in the US it’s a core sector. It’s enormous,” Martin-Henry says. Data centres muddling into REITs The growth and performance of data centres in general, and particularly for the $12.9-billion Goodman pipeline which is now 57 per cent server sheds , will also begin to re-shape A-REITs. Schmidt says that “Goodman had a really strong run leading up to last year’s result, so earlier years were kind of priced in”. ▲ Data centres in Australian property funds are still a phenomenon in its infancy. “While data centres are a key part of their pipeline, they haven’t really seen the payoff come from that yet. “Some of the global funds that we see at the top of the leaderboard, in comparison, are quite well progressed and have significant holdings in data centre providers like Equinix and Digital Realty.” The question of whether data centres are infrastructure, utilities or real estate assets is also relevant to REIT fund structures, Martin-Henry says. “It’s a constant, constant discussion… looking at some of our indices, we’re seeing more data centres going to infrastructure funds and to me, it does raise interesting points.” ▲ The characteristics of data centre assets do not align perfectly with typical infrastructure nor real estate funds. Infrastructure funds typically incorporate “set-and-forget” assets with stable cash flow, in contrast to “more erratic or more volatile real estate”. “So clearly, the investors think that these data centres will perform much like infrastructure… but for me personally, the value is in the tech inside the building,” Martin-Henry says. But the underlying assets don’t behave like classical infrastructure or real estate assets, nor fit neatly into their funds. Data centres may need to be built with a view to future retrofitting for different cooling technology, or with empty rack space for future expansion. Meanwhile, some assets in the US are already seeing chip obsolescence risk pushing up yields. “So if you look at the investment, just purely rack-by-income, it looks quite low because they’re not being utilised at the moment…this is why it speaks to the fact that it’s not real estate, because you’re talking about the internal fittings. “Whereas I don’t think I’ve ever talked about what kind of desk is in an office building.” Currency, trader sentiment making impact Property markets are not the only inputs into fund performance. Schmidt says that the ASX saw “a significant risk sell-off around April, given global uncertainty, the ongoing trade war and tariffs, and the Iran war”. “That flowed through significantly into what we saw for A-REITs, so that sentiment did have an impact,” Schmidt says. “And then that was compounded by interest rates not going in the direction that would be beneficial to these structures.” According to Schmidt, A-REITs are highly sensitive to interest rate movements, “because the higher discount rates from yields going up can reduce the present value of those future income streams”. ▲ Pricing shares in A-REITs is a complex proposition and asset value is just one of the factors. “That’s also compounded by rising borrowing costs, where there is leverage at play.” Australian-listed global REITs, by comparison, performed well but struggled with an 8.1 per cent appreciation in the Australian dollar over the 2025-26 financial year. Funds that hedged against currency risk returned about 7 per cent more than their unhedged equivalents, according to Rainmaker research. While A-REITs may be underpriced, analysts are hesitant to predict what markets will do over the year ahead. “There’s so much geopolitical uncertainty. It’s really hard to see where things will go,” Schmidt says. Martin-Henry says that “what we’re seeing is a bit of a pause in activity, as people try and work out what’s going on in the world”. “I think everyone’s trying to get to grips with what’s going on. Every other day, there seems to be a new issue.”

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Patrick Lau
Thu 03 Sep 26

Struggling A-REITs Face New Test as Property Sectors Diverge

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