For income investors, there was a time when Australian real estate investment trusts (AREITs) were a ‘must have’.
However, in the current climate, driven by artificial intelligence fever and a flight to purported safety in well known, large capitalisation stocks, share markets around the world are at or near record highs. Dependable AREITs have been forgotten in the rush.
For active managers like Dexus, the extent of the disinterest is a measure of the opportunity. When a sector becomes unloved, prices often detach from reality.
As Dexus Global REIT Fund Portfolio Manager David Kruth put it in Mispriced in plain site: The case for global REITs, “The last time GREITs lagged global equities by as much as they do now, Australia was over excited about One.Tel and living rooms crackled to the sound of dial up internet.”
In this article, we’ll address one of the issues we think might be holding investors back from availing themselves of this opportunity. First, though, let’s examine the current predicament.
The Reserve Bank of Australia has raised interest rates three times since the beginning of the year. With core inflation rising, markets are forecasting a fourth. This is negative for rate sensitive sectors like real estate because higher rates increase funding costs, place downward pressure on valuations and raise concerns around debt serviceability and growth.
These concerns are evident in the numbers. As Australia’s 10-year bond yield hit cyclical highs above 5% in March, the AREIT 300 Index fell to a 52 week low, down 16% over the month. This narrative may have taken root in AREIT pricing, but it ignores a more fundamental perspective; debt simply isn’t the issue investors believe it is.
The AREIT sector experienced a period of increased leverage before the Global Financial Crisis (GFC), with gearing reaching 44% in 20071. It destroyed some of the most storied companies in the sector.
Since then, it has returned to its knitting. Before the Covid-19 pandemic, average sector gearing had fallen to 29%. By June 2025, it had fallen to 26%, surviving the trickiest environment since the financial crisis. Currently, average gearing across the sector remains at about 27%—well below historical averages.
Another measure of financial wellbeing, the interest cover ratio (ICR), which measures an AREIT’s ability to pay interest on its outstanding debt is also in rude health. This is important because, as the GFC proved, it's an indicator of solvency and dividend reliability.
Chart 1: Interest cover ratios and gearing by AREIT
Source: Individual company disclosure as Dec 25
Whilst the Dexus AREIT Fund is focused on stocks with low gearing and high interest cover in the lower right quadrant, more than half of all AREITs report an ICR greater than three times, comfortably above the standard covenant threshold of two times.
The sector has also done a good job of lowering not just the amount of debt it carries but also managing the per dollar costs of servicing it.
Rising rates remain a concern, but much of the impact has already been incorporated. With the average cost of debt at about 5.5%, the sector has already repriced a significant portion of its debt base. The market is overestimating the immediate impact of rising rates.
Chart 2: First half FY2026 debt costs by AREIT
Source: Individual company’s disclosure as Dec 25
Credit margin compression is another benevolent factor. As lenders chase higher quality borrowers like AREITs, they’ve been able to refinance at relatively lower margin. These margin savings have partially offset the impact of recent rate rises.
The impact of higher rates cannot be eliminated, but the incremental impact on earnings and serviceability is less severe than headline rates imply.
The sector’s conservative hedging strategy is another critical differentiator. Many AREITs have over 75% of their debt hedged into FY27, with the full impact of higher rates deferred, at the earliest, to FY28. In other words, the rate cycle impact is not immediate; it is lagged and manageable.
Chart 3 – FY27 hedging and hedge rate by AREIT
Source: Individual company’s disclosure as Dec 25
In the past, real estate valuation was driven by capitalisation rate compression; as interest rates fell, assets became more valuable. That remains true to an extent. Indeed, it goes a long way to explaining why the sector is currently trading at a ~8% discount to net tangible assets (NTA) (excluding the fund managers), broadly in line with the valuation levels seen during the 2022 tightening cycle.
But the focus is shifting decisively toward income growth. High occupancy levels, strong leasing outcomes and CPI linked rental escalations offer a structural tailwind for income growth, which in turn strengthens debt serviceability.
Investors have been slow to recognise this reality and the opportunity. In our view, the disconnect is unjustified. The AREIT sector is fundamentally sound, conservatively geared and boasts resilient income streams.
For income investors willing to look past the empty breakfast rooms and the "unloved" label, the current mispricing is creating selective, high value opportunities.
AREITs with lower balance sheet risk, strong hedging profiles and CPI linked rental incomes like Vicinity Centres (retail exposure with resilient income dynamics) and Arena REIT (alternative REIT with defensive earnings profile) are examples of our approach.
In a higher-for-longer rate environment, the focus must remain on disciplined balance sheets and assets with pricing power. That is where the real opportunity lies.
That’s why we think AREITs are past the worst of it; this remains a time of opportunity for those with the patience to look and the need for stability in a time of discord.
1 See A multi factor analysis of AREIT returns, a 2009 paper from Jaime L.P. Yong of Edith Cowan
Invest in AREITs
The Dexus AREIT Fund (DXAF) is an income-focused property securities fund that invests in a portfolio of listed Australian Real Estate Investment Trusts (AREITs).
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Disclaimer and important notes
Dexus Asset Management Limited (ACN 080 674 479, AFSL 237500) ("Responsible Entity") is the responsible entity of the Dexus AREIT Fund (ARSN 134 361 229) (“DXAF” or “Fund”) and issuer of units in the Fund. The Responsible Entity is a wholly owned subsidiary of Dexus (ASX: DXS).
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