Why AREIT investors shouldn’t wait for the starter’s gun - Part 1
7 minutes14 February 2025
At first glance, making the case that 2025 will be a standout year for AREIT investors might seem like a stretch. In 2024, the S&P/ASX 300 AREIT returned 17.6% outperforming the benchmark ASX 300 index by 6.2%.
How can any asset class offer attractive returns, especially conservatively managed assets like commercial property, after such a significant rise in such a short period?
There are two reasons.
1. Long-term neglect
Thanks to the pandemic and its structural challenges, especially in the shopping centre and office sub-sectors, AREITs have been overlooked for years.
Over the past five years, the annualised return of the S&P/ASX 300 AREIT has been just 6%. Even with average annual income of 4.2%, AREITs remain, as analysts might describe, ‘bombed out’.
Despite the impressive recent returns, many AREITs remain undervalued, some substantially so. This is a point we’ll explore in more detail in Part 2. The conclusion? There is still time to profit from the recovery.
2. Waiting for the starter’s gun
In almost every area of investing, there’s a tendency to wait for the starter’s gun—a clear signal that the recovery has begun.
AREITs are widely considered sensitive to interest rates. For commercial property, the signal investors are waiting for is lower interest rates. The consensus view is to hold off on increasing exposure to the sector until rates begin to fall.
As the chart below shows, history suggests this can be costly. Investors usually anticipate rate cuts well before they actually occur. We expect a similar reaction in Australia when the Reserve Bank of Australia (RBA) signals imminent rate cuts.
Don’t wait for the bang
The key takeaway is this: wise investors don’t wait for the ‘bang’. By the time the starter’s gun goes off, much of the opportunity has already passed.
The following chart illustrates this point. As UBS noted in November 2024:
“Analysis of AREIT performance around the first Fed and RBA rate cuts in prior cycles suggests performance improves materially in the six to nine weeks ahead of the commencement of a cutting cycle.”
Source: UBS
Enhanced returns are made when investors act before the starter’s gun is fired, taking advantage of attractive forecast returns without waiting for a short-term catalyst.
This raises another question: When might rates fall?
There are no certainties. However, while the United States, the UK, and the Eurozone have begun lowering rates, Australia (despite mounting criticism) has yet to follow suit. Market analysis by Dexus Research suggests this is likely to change in 2025, as per the following chart.
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, as we are doing in the Dexus AREIT Fund portfolio.
However, not all AREITs are created equal. While 2025 promises to be an exciting year for income-focused investors, discretion is essential.
This will be the focus of Part 2 , where we’ll explore how to identify undervalued AREITs and seize the best opportunities before the starter’s gun fires.
Invest in AREIT
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