Interest rates and inflation-linked bond yields are significantly influencing property pricing, emphasising the need for a valuation-led investment approach in Australian Real Estate Investment Trusts (AREITs), according to SG Hiscock portfolio manager Grant Berry. Australian inflation-linked bond yields, now around 2.4 per cent, have reached their highest level in nearly 15 years, posing a challenge for property valuations and reducing the likelihood of a return to previous low capitalisation rates. Berry noted that while market sentiment often reacts to short-term rate expectations, the underlying factors driving property values are rooted in long-term yields and structural demand.
With Australia’s official cash rate steady at 3.60 per cent, the Reserve Bank of Australia (RBA) maintains a careful stance as inflation remains slightly above the RBA’s target band. Berry highlighted the implications for investors, stating that institutional-grade real estate investors typically base valuations on long-term real rates, as reflected in inflation-linked bonds. This environment presents contrarian opportunities, particularly in office AREITs, which are currently undervalued. AREITs, or Australian Real Estate Investment Trusts, are companies that own, operate, or finance income-generating real estate across a range of property sectors.
Berry suggests that office AREITs, currently trading below both market transaction values and replacement costs, offer investors access to institutional-quality assets at historically appealing entry points. He also noted that residential-focused AREITs remain attractive due to strong demand-supply imbalances and adaptive developers. Mirvac, in particular, is well-positioned to capitalise on ongoing structural demand within the residential sector.
