AREIT risks and rewards: Your 2025 guide

Why choose Australian Real Estate Investment Trusts (AREITs)?

There was a time when investing in commercial property was an “all or nothing” affair. It was impossible to purchase a part of a shopping centre, warehouse or hospital in a format that made it easy to buy and sell. Everything was purchased and sold in its entirety, which is why to this day many investors think commercial property is beyond their means.

The advent of the listed property trust (REIT) sector in the 1970s changed all that (read our essential 2025 guide to AREITs ). The first Australian REIT (AREIT) - General Property Trust - was listed in 1971. As of 31 December 2024, there are over 40 listed AREITs with a combined market capitalisation of $177bn. (Source: ASX).

The sector has also expanded to include property securities funds and unlisted property trusts, sometimes known as syndicates, each with their own pros and cons.

It’s now possible to access almost every kind of commercial property, from shopping centres and child care centres to premium offices and large format retail, buying and selling small parcels of real estate much as one would an ordinary share, with minimal upfront capital commitment.

Why choose Australian Real Estate Investment Trusts (AREITs)?

You may not know of the term but you will almost certainly know the names. Scentre Group, Stockland and GPT Group are three well-known AREITs. Each aims to offer investors reliable, stable income by owning, managing and operating income-producing commercial real estate.

Listed on the Australian Securities Exchange (ASX), AREITs can be traded just like ordinary shares, allowing investors to purchase an interest in a diversified, professionally managed portfolio of real estate in much the same way as you might purchase shares to build a portfolio.

There are seven major benefits of using AREITs to gain exposure to the commercial property sector:

1. Easy to build a diverse portfolio

The listed AREIT sector includes thousands of properties, from shopping centres, commercial office space and healthcare facilities to self storage, data centres and warehouses. You can even access REITs in Asia, Europe and the US, making it easy to build a diverse portfolio of listed commercial property assets at home and overseas.

If you don’t want to build your own REIT portfolio, unlisted funds like the Dexus  AREIT Fund and the Dexus Global REIT Fund offer a ready made solution. Actively managed funds like this charge an annual fee—under 1%—to gain access to an instant, diversified portfolio of commercial property managed by experts. 

2. Simple to buy and sell

Investing in AREITs can be as easy as trading ordinary shares, and just as cost-effective. And because there’s a liquid market for most securities you can usually buy and sell when you want. Of course, you’ll need a broking account, but once you’ve got that you’re good to go.

As for unlisted AREIT funds, each produces a Product Disclosure Statement (PDS) covering how the fund works, the risks, benefits, fees and taxation implications. Once you’ve examined this document, simply complete and submit an application form available on the fund manager’s website.

3. Low entry costs

Compared to the large capital commitment required when directly purchasing a commercial property investment, buying AREITs requires only a small capital outlay - as little as the minimum parcel of securities required by your broker. In the case of unlisted funds, these often have a minimum initial investment, which can be as low as $1,000.

4. Relatively high yields

AREITs generally pay out a higher percentage of earnings as distributions than ordinary shares.  They also tend to offer a more dependable, higher yield than that usually available from residential property, or from dividend-orientated shares like the major banks or Woolworths, for example. Because income is typically sourced from rents rather than more volatile corporate earnings, the sector tends to attract investors reliant on a regular income.

5. Management expertise

Each AREIT is managed by a team of specialist property and investment experts focused on maximising rental returns and long term capital growth for their investors. This also removes the need for investors to participate in rental negotiations, building maintenance and the like.  

6. Tax effective

The regular income distributions from AREITs originates in the rental income received from tenants. These distributions may contain a ‘tax-deferred’ component, which occurs if a property trust’s distributable income is higher than its taxable income.
Because a trust can offset its taxable income through a range of deductions – depreciation on plant and equipment, capital allowances on building structures, interest and costs during construction or refurbishment, and the costs of raising equity to name but a few – a trust’s distributable income is frequently higher than its taxable income. 

7. Capital growth

AREITs tend to be income-driven investments, which is why they attract investors seeking a stable, sustainable income stream from commercial property, with little up-front investment. Capital growth is generally consistent with inflation over the medium to long term, adding to AREITs’ defensive qualities.

What are the risks?

As with ordinary shares, AREITs can sometimes be relatively cheap and at other periods over-priced. There’s a risk that you might buy and sell at the wrong time.

Then there’s the need for diversification, across sectors and geographies. Building a sensible, high-performing portfolio of AREITs requires similar skills to building a portfolio of listed shares. You may not have the time or inclination to acquire those skills.
Finally, there’s the risk that every self-directed investor takes; whilst acquiring sophisticated analytical skills - assessing an AREIT’s debt levels, management capability and earnings capacity for example - is one thing; applying those skills successfully at a time of high emotion is another.

For these reasons, some AREIT investors prefer to pay expert professionals to develop and manage a high-performing commercial property portfolio on their behalf.

How have AREITs performed?

AREITs generate most of their income (circa 55-70%) from the rent collected from the tenants of the properties they own. The chart below shows total returns over the short to long-term.

 
_{Source: Dexus . As at Dec 24.
Past performance is not a reliable indicator of future performance.} 


The above chart shows the importance of income to total returns. Of course, the associated risk is greater than a term deposit but it’s typically lower than the kind of yield you might get from ordinary shares.

Over the last decade, AREITs have delivered an income stream, in the form of a distribution yield, consistently above the 10-year bond rate, until more recent times, where Goodman Group’s outperformance and size has had an outsized impact on the distribution yield the sector delivers. (Goodman Group’s distribution yield until recently had consistently been under 1%).

_{Past performance is not a reliable indicator of future performance.} 


What is the outlook for 2025?

In 2024, the S&P/ASX 300 AREIT index returned 17.6% outperforming the benchmark ASX 300 index by 6.2%. The pandemic, and the structural challenges it highlighted, especially in the shopping centre and office sub-sectors, meant that AREITs had been overlooked for years.

The performance in 2024 was therefore a year of recovery, a recognition that shopping centres and high quality office space weren’t going away. Although there are no certainties, Dexus expects that this recovery will continue through 2025.

Many AREITs are still trading below net asset value and falling borrowing costs will materially reduce AREIT funding costs, enabling them to pursue growth opportunities. AREITs with well-funded balance sheets are positioned to acquire assets at attractive prices. However, not all AREITs are created equal. While 2025 promises to be an exciting year for income-focused investors, discretion is essential.

AREITs should be considered as a long-term investment. Over a five to seven-year period, there is generally a 7-10% p.a. target return from AREITs, most of it derived from income, plus growth that typically equates to the rate of inflation.