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This month, we will take a look at investing in Real Estate Investment Trusts (REITs), which are a key allocation in many client investment portfolios at PSK.
A Real Estate Investment Trust (REIT) is an investment vehicle that owns, operates, or finances income-producing real estate. REITs pool investor capital to purchase property assets across sectors such as commercial offices, shopping centres, logistics warehouses, healthcare facilities, and residential housing. They distribute most of their rental income as dividends, making them a transparent and income-focused way to access property markets. REITs are generally listed on stock exchanges, such as the ASX.
Investors can access real estate either directly (by buying property themselves or through an unlisted fund) or indirectly through a REIT. Direct property typically involves higher entry costs, concentration risk (one or two properties), and limited liquidity. It can also require active management of tenants, financing, and maintenance. REITs, by contrast, allow investors to hold a diversified basket of property assets with the benefits of professional management and daily liquidity via the stock exchange. While REITs are subject to market volatility, they provide transparency, income visibility, and diversification that direct property often lacks.
REITs have several attractive characteristics for portfolios:
These features make REITs a useful tool for balancing growth and income objectives while adjusting overall portfolio risk.
The REIT sector has faced challenges over the past two years from rising interest rates, which increased financing costs and pressured valuations. As rates stabilise and potentially decline in 2025–26, REITs should benefit from both lower debt expenses and improved investor demand for income-generating assets.
REITs are currently offering investors an attractive entry point relative to history. In many cases, listed REITs are trading at discounts to their underlying net tangible asset values (NTA). This means investors can access high-quality property portfolios through REITs at prices below the cost of acquiring or developing those assets directly. Global REITs are one of the few in the market with valuations below their long-term average, with most sectors well above long term averages.
A key concept in the REITs sector is replacement cost, which is the cost of building a similar property today. In the current environment, higher construction, financing, and labour costs mean it is often uneconomic to develop new properties at today’s market rents. As a result, the value of existing assets is better protected, as replacement supply is limited. For investors, this provides a margin of safety and supports the long-term income and capital growth prospects of REITs.
From a pricing perspective, REITs have already absorbed significant valuation adjustments during the period of rising interest rates. With rates now expected to stabilise and gradually decline, the pressure on REIT valuations is easing. This creates potential for a re-rating of the sector as investors seek income-producing assets with defensive qualities.
The outlook also supports a selective approach within the sector. Industrial and logistics REITs are benefiting from the structural shift to e-commerce, while healthcare and residential REITs are positioned to capture demographic demand. Retail and office REITs face more mixed conditions, but prime assets with strong tenant demand remain well-supported.
Together, discounted pricing, limited new supply due to high replacement costs, and a more favourable interest rate environment, create a compelling case for including REITs in portfolios today.
Markets broadly look expensive today, despite significant uncertainty and challenges from tariffs, policy and geopolitical risk. There is also very high levels of optimism for the growth of AI, which may prove to be more challenging or less impactful than markets expect. If markets do not accurately account for the risks in equity prices, REITs become increasingly attractive.
To invest in REITs, investors can either access a managed fund that focusses on REITs, or invest directly in listed REITs as part of a broader listed investment portfolio. We see value in holding REITs in a well-diversified portfolio.
The Investment & Research team at PSK are always monitoring market conditions and data points to ensure portfolios align with our overall long-term objectives. If you’d like to discuss any of the points raised, please contact your Adviser or call us on (02) 8365 8300.
General Advice Warning - Any advice included in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on the advice, you should consider whether it's appropriate to you, in light of your objectives, financial situation or needs.
