A-REITs: Debt And RBA Hikes vs Solid Momentum

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This story features CHARTER HALL GROUP, and other companies.
For more info SHARE ANALYSIS: CHC
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

A-REITs underperformed during result season despite positive results, hampered by rate rise fears (unlikely to subside in the short term). The outlook is not necessarily bleak.

• A-REITs post solid earnings results on average
• The sector nevertheless underperformed during February
• Valuations appear attractive
• Extent of debt hedging one key variable

By Greg Peel

On average, Australian real estate investment trust’s (A-REIT) December-half 2025 results beat consensus by 1.8% and all A-REITs reaffirmed or increased guidance, leading to marginal net increases for FY26 (average 0.2%), Macquarie reports.

Ten out of 28 A-REITs covered by Macquarie upgraded.

However, the sector registered broad net forecast decreases for FY27 (-0.5%) and FY28 (-0.8%). A-REIT earnings growth is expected by Macquarie to be lower in FY26 than FY25 before accelerating into FY27.

UBS equally observed the real estate sector underperformed materially throughout the February earnings season –down -6.6% since February 3 versus a 3.0% gain for the ASX 200– despite a growth outlook which has remained resilient.

1H26 earnings came in 1% ahead of UBS on average, with 50% of results in line and ‘beats’ outweighing ‘misses’ by 2.7-to-1.

More importantly for UBS, FY26-28 earnings forecasts remained broadly flat which has left UBS’ three-year FY26-29 compound annual earnings growth rate assumption (excluding property fund managers) little changed at 5.2% (down from 5.3%).

This is seen as attractive in the context of near-term dividend yields in excess of 5% and PE multiples of circa 15x.

While compressing debt margins and solid property-level performance has helped sustain earnings, this has been overshadowed by macro headwinds, most recently the Iran conflict and a hawkish turn from RBA Governor Bullock last week.

UBS now expects another rate hike in August, with May still penciled in.

Jarden highlights 1H26 results confirmed the A-REIT sector is caught between strong operational trends (rent growth, development normalising), valuation support (net tangible asset value growth returning) and interest rate headwinds (the three-year swap rate has risen 90bps to 4.3% since October).

February saw results 3% above Jarden’s forecasts and guidance upgraded (5 out of 24 under coverage) or maintained, with no A-REITs downgrading.

Net tangible asset (NTA) valuations increased circa 2% on average, supported by valuation growth across the board with the strongest gains seen in manufactured housing estates and retail, while the office and logistics sectors lagged.

Active business models saw continued better momentum with fund managers still able to raise/deploy capital in a higher rate world, Jarden notes, for example Charter Hall Group ((CHC)), and developers, eg Mirvac Group ((MGR)), finding the operating environment has normalised.

Key positive updates came from Mirvac, Dexus ((DXS)) and Charter Hall while updates from Scentre Group ((SCG)), Stockland ((SGP)), HMC Capital ((HMC)) and Centuria Capital ((CNI)) fell short of Jarden’s expectations. 

Post Result Performance

Despite upbeat 1H26 updates, the A-REIT sector lagged the market over February, as noted, as large sectors (banks, materials) outperformed.

The drop in the ASX200 property index was largely commensurate with Jarden’s target price changes, down circa -4% due to higher rates impacting valuations.

Within the sector, “value” names, such as Dexus and Mirvac outperformed “growth” names, such as Goodman Group ((GMG)) and Charter Hall, highlighting crowded positioning.

Earnings revisions didn’t work as a factor through February, Jarden notes; even a 5% upgrade to guidance saw Charter Hall underperform, with the valuation already elevated heading into results.

Looking at the three-day relative moves post reporting, Jarden notes the top three performing A-REITs were Dexus (6%), Mirvac (4%) and Charter Hall Retail REIT ((CQR)) (3%) and the bottom three were Lifestyle Communities ((LIC)) (-12%), Charter Hall Group (-11%) and Goodman (-6%). 

Compared to the previous RBA hiking cycle, UBS believes A-REITs are now better positioned for a higher rate outlook, with debt initiatives (refinancing with margin benefit), hedging closer to market and robust top-line growth all helping to underpin sound earnings growth.

Cost of Debt

The rising cost of debt is still weighing on growth, Macquarie notes, and given differing levels of interest rate hedging, is a significant driver of variance in growth profiles between A-REITs.

Macquarie’s FY26 earnings forecasts are broadly in line with consensus, but for FY27, A-REITs with the largest positive variance are Dexus, Lendlease ((LLC)) and Healthco Healthcare & Wellness REIT ((HCW)).

A-REITs with the largest negative variance, Macquarie notes, are HMC Capital and DigiCo Infrastructure REIT ((DGT)).

Reported gearing levels are typically around the midpoint of target ranges, limiting acquisition capacity. Macquarie suggests the standouts on capacity are Vicinity Centres ((VCX)), Region Group ((RGN)), and Dexus Industria REIT ((DXI)).

Therefore, expansion via funds and capital partnerships will be a differentiator for earnings growth. Charter Hall and Goodman are proven performers, and Macquarie believes recent de-ratings present a more attractive entry point.

Macquarie’s key sector picks are Goodman, Mirvac and Charter Hall among the large cap REITs, and Qualitas ((QAL)) and Arena REIT ((ARF)) among the smaller names.

Note Macquarie is an outlier in having no further rate rises factored into its earnings forecasts.

Morgan Stanley is forecasting one more 25bps RBA rate rise in May. This broker believes A-REIT cost of debt risks are under-appreciated.

Having examined every A-REIT’s (excluding property fund managers) interest rate hedges, Morgan Stanley thinks rate headwinds could be a drag on earnings growth for some in 2H26-FY28.

The broker suggests REITs with a steep declining interest rate hedge profile appear most at risk, while those with consistently high hedging, or those already with a high cost of debt, should be able to produce bottom line growth commensurate with their revenue trajectory.

While Morgan Stanley’s 12-month stock recommendations are not based purely on the weighted average cost of debt (WACD) outlook, from a short-term trading perspective the broker suggests equities investors may base defensive preferences on earnings revisions risk arising from rates, especially with the focus on RBA and possibility of further hikes.

Mirvac and GemLife Communities Group ((GLF)) could see a small decline in WACD between now and FY28, while Centuria Office REIT ((COF)), Homeco Daily Needs REIT ((HDN)), Vicinity Centres, Stockland and Centuria Industrial REIT ((CIP)) may endure WACD increase of less than 15bps.

On the other hand, Morgan Stanley warns Region Group, Arena REIT, Scentre Group, Charter Hall Long WALE REIT ((CLW)) and Healthco Healthcare & Wellness REIT could, in theory, experience more than a 35bps uplift in WACD over the next two years.

Healthco Healthcare & Wellness and Charter Hall Long WALE could see their WACD increase by more than 60bps over the next two years, Morgan Stanley warns, which could translate to a -6.0/-8.6% earnings headwind.

Scentre Group –because its hedged debt drops from 91% (at 3%) in 2026 to 28% in 2028– could experience a 52bps uplift in WACD over this period, however Scentre’s expensive margin means refinancing could alleviate any concerns, Morgan Stanley suggests.

The broker notes Mirvac and Vicinity are the two large caps with a relatively stable cost of debt over the next two and a half years. Mirvac’s current hedging is low at 56%, at a high base rate of 3.3%, and Vicinity is more than 70% hedged to FY28, at a consistent rate of circa 3%.

Postscript

Prior to the war on Iran, economists were for the most part already forecasting at least one more RBA rate hike this year due to persistently sticky inflation. The resultant oil price shock has brought warnings of even more pressure on the RBA to raise rates.

Notwithstanding extreme volatility in oil prices in the past week (up to almost US$120/bbl and back to US$90/bbl at the time of writing), driven by uncertainty over the duration of the war, strategic reserve releases, Straits of Hormuz access etc, the question for the RBA is whether oil price-driven inflation justifies kicking Australians further when they are already down.

Were oil prices to remain elevated for some time, economic growth would be impacted, and such the RBA would have to balance the two conflicting drivers (ie stagflation) in its rate decisions, suggesting an oil price-driven hike is not necessarily a given.

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