How Are Higher Interest Rates Hitting Australian REITs in 2026?

There have been difficult times for A-REITs and they aren’t over just yet, as the RBA raised interest rates three times already this year in 2026, pushing the cash rate all the way up to 4.35%, while also dealing with challenges such as increasing funding costs, declining assets values, pressured distributions and investors who can earn safe interest rates from bonds and term deposits without having to take equity risks.

Australian real estate investments are down 14% in 2026, as a combination of factors including higher bond rates, higher RBA rates and geopolitical tensions in the Middle East, have created a difficult macroeconomic environment for Australian REITs.

As an investor, understanding why and what kind of REITs are surviving through the tough economic times is crucial for you to understand.

The Mechanics of Why Rates Hurt REITs So Much

REITs are even more interest rate sensitive relative to almost all other sectors listed on the ASX, and there are three unique reasons why.

The first reason involves the cost of debt. The REITs are capital-intensive businesses that take advantage of borrowed money in order to own and develop their property. Higher rates mean higher costs for this debt. For companies with floating-rate debt or debts coming to maturity, this effect on the bottom line may be quite sudden and significant.

The second factor here concerns valuation. As the rate of return investors require from property rises due to the higher rates available on the riskless investments, the asset values will fall slowly but steadily. In essence, this results in the erosion of net tangible assets for the REITs.

And thirdly, higher rates increase the relative attractiveness of fixed-income securities, thereby making a 5-6% yield from a REIT less attractive given a 4-5% term deposit or government bond. The investor rotates the portfolio and the stock price falls.

Higher bond yields make the future cash flow stream less valuable at any point in time, while rising interest rates result in a higher cost of borrowing.

Where Share Prices Stand

However, the harm in 2026 among the leading A-REITs has been widespread and intense.

Scentre Group's share price has been dragged lower by 17.38% to $3.50, while Stockland's has dropped 19.22% to $4.65.

Goodman Group's results included a drop in operating profit of 1.5% to $1.2 billion and a fall in operating earnings per share of 8.3% to 58.5 cents for the half year to December 31. Despite analysts having expected an upward revision of guidance, this did not materialize, scaring investors off and causing the share price to drop 7%. 

In terms of the overall market, the ASX REIT Index comprises Goodman Group, Scentre Group, Dexus, Mirvac Group, Charter Hall Group, Stockland and GPT Group, thus covering industrial, office, retail and mixed-use assets.

The individual one-year performance figures give a clear indication of just how split the sector is. Charter Hall has been boosted by 42.8%, while Dexus and National Storage REIT have both declined 4.9% and 7.5%, respectively, in the last 12 months.

Not All REITs Are Equal — The Sector Breakdown

Not all real estate segments have been affected in the same way by the rate environment. This will be critical for investors in the sector.

Industrial and Logistics — The Relative Bright Spot

Industrial and logistics REITs have fared relatively well, underpinned by the structural tailwind of e-commerce and changing supply chains. There is still more demand than supply in many markets for industrial and logistics space, resulting in rental increases that help offset the effects of rising capitalisation rates on values.

Goodman Group provides an excellent illustration. While there are challenges with the share price caused by the interest-rate environment, the company’s underlying operations – industrial and data centre property worldwide – are performing very strongly and there is high demand for its space. It’s simply a matter of valuation.

There are still tailwinds at work for industrial and logistics real estate, but even they are affected when cap rates rise.

Retail REITs — Consumer Stress Adding a Second Layer of Pain

It looks like the retail REITs may find themselves caught between a rock and a hard place. They suffer from the negative impact of the rate rises through the valuation and debt channels common to the entire sector. However, there is another side to the demand story as higher interest costs and rising living expenses are also impacting retail tenants’ customers, hence demand.

The interest rates and cost of living have become a constraint for consumers, which, in turn, influences the retailers occupying those premises.

Scentre Group, owner of the Westfield shopping centre chain throughout Australia, is currently viewed as one of the leading retail REITs tracked by the ASX market. It can be considered as a leading barometer of reaction to rate changes by retail REITs. Scentre’s decline of around 17% so far this year tells you that there is no love lost regarding the expectations for the consumer sector.

On the other hand, Scentre managed to post an increase of 4.9% in the FFO for the last reported quarter, while its occupancy rate remains stable.

Office REITs — Structurally Challenged Beyond Just Rates

The hardest challenge lies ahead for office REITs. They face the same rate headwind as others; however, they are burdened with the issue of structural change towards the hybrid work model, which permanently alters the amount of space needed by firms. 

REITs that are exposed to office buildings underperformed on account of lower occupancy levels and structural changes in demand. Dexus, for instance, with significant exposure to office properties, underperformed by -4.9% in the last year.

Office property market faces structural challenges owing to the hybrid work model, which still hasn't been solved.

The Refinancing Risk Sitting Underneath the Sector

Another risk that is somewhat under the radar but very real is that of debt refinancing. REITs that have high levels of debt coming due within the next 12-24 months are exposed to having to rollover their debt at much higher interest rates compared to when they originally took on the debt.

In this respect, investors investing in REITs need to be aware of what kind of debt burden such companies have and when they expect to roll-over the debt. In this case, those trusts whose loans come due in the near future will be hit by the second rate increase very quickly.

That being said, some trusts have mitigated this risk through proactive action. Recently, one REIT trust managed to refinance its $810 million in facilities out to 2028, improving its margins while hedging approximately 70% of its debt up until 2026. Such an approach offers some insurance against the risk that interest rates might remain high for longer than expected.

What the Results Season Showed

But even amid all this pain for shares, the reality of what has been delivered from an operational perspective by A-REITs is still pretty solid.

As per the most recent Macquarie Research report on the sector, December 2025 half profits outpaced analyst expectations by 1.8%, and all A-REITs have maintained or raised FY26 guidance. And this is an important data point because, again, it shows that business operations have not collapsed, but rather it's just that the stock market is repricing the sector for higher interest rates.

Scentre Group delivered a profit lift of 4.9% from its funds from operations, while also reaffirming that customers continued to visit its facilities at good levels.

So this dichotomy of robust operations but weaker share prices raises an important issue for patient investors – are A-REIT stocks undervalued or not?

The Iran War Complication

The headwind for the rates environment facing REITs has been amplified by the unique variable of the Middle East situation in 2026. The conflict with Iran has added another layer of complication to the environment by adding an additional element of inflation to the equation through its effect on energy costs.

Energy is the key channel for this impact. Increasing fuel prices will affect transportation, construction, and operational costs. In a country such as Australia, which is sensitive to global energy prices, this effect carries significance. Increased construction costs will be reflected in the pipeline of development projects, putting pressure on the margins of REITs engaged in development activities.

What Would Change the Outlook

The most important positive catalyst for the A-REITs would have to be some sort of sign that the hiking cycle by the RBA is now over. Holding interest rates constant alone usually stabilises the REITs sentiment simply because there is no fear of rising debt costs.

Even a weak GDP report from tomorrow’s first quarter numbers may not necessarily be a bad sign as this will ease pressure on the RBA to maintain interest rates. As a result, the premium for this uncertainty among investors will come down.

The future prospects for the XPJ index will be mostly dependent upon the future movement of interest rates and real estate. Interest rate declines in the future could help improve their valuations.

On the other hand, changes in the cap rate could prove to be another important wildcard. If property valuations were to stabilise, i.e., if cap rates were not to increase, then the decline in net tangible assets would also be taken out of the equation.

Source : ( Market Analysis )

Disclaimer:  This article is for informational purposes only and does not constitute financial advice. Past performance is not indicative of future returns.