How interest rate cuts in 2024 could do (even more) wonders for unlisted property trusts

The property market has eagerly awaited every Reserve Bank meeting announcement since interest rates began rising in May 2022. But in 2024, many Australians are hopeful for some rate cuts. Here’s what rate reductions would mean for investors in unlisted property trusts.

The real estate investment landscape is always evolving. And one of the key factors influencing the fortunes of the industry is the movement of interest rates.

As we step into 2024, the spectre of interest rate cuts looms large, casting a positive light on the prospects of Australia’s unlisted property trust industry.

With our sun tans from a well-deserved summer break still gleaming from our computer screens, we’ll explore how potential interest rate cuts in 2024 could serve as a catalyst for the unlisted property trust sector, building on the momentum seen in the final months of 2023.

A strong finish in 2023

The closing months of 2023 witnessed a notable surge in the real estate investment trust sector, the market of which achieved average total returns of almost 12 per cent in the calendar year, according to the Australian Financial Review.

The lion’s share of these gains materialised in the last quarter of 2023, which closed slightly above 8 per cent for the year. This upward trajectory was spurred by a significant drop in bond yields, as market expectations on the rate cycle were recalibrated.

Bond yields, REITs and unlisted property trusts

It’s no secret that REITs and unlisted property funds tend to see improved valuations as Treasury yields decline. The AFR notes that the fall in yields on 10-year Australian Treasury notes from near 5 per cent in October to below 4 per cent by the end of 2023 played a pivotal role in the sector’s resurgence.

And it’s this relationship between bond yields and property investment trust performance that underscores the industry’s sensitivity to interest rate movements.

Analyst insights and strategies

According to Jarden, one of Australia’s leading investment and advisory groups, the outperformance of the REIT and unlisted property trust sectors in 2023 was primarily driven by the anticipation of lower bond yields and rates in the last quarter of the year.

And the good news for unit holders in REITs and unlisted property trusts is the prospect of interest rate cuts in 2024 is now fueling further speculation on the sector’s future trajectory.

While Jarden’s view is conservative compared to other advisories and institutions (suggesting no rate cuts until 2025, while an AFR economist survey sees many experts tipping a May 2024 rate cut) the potential for stable rates is still seen as positive for the unlisted property market.

Opportunities within the sector

Unlisted property trusts, with yield offerings closely tied to the cost of debt, are poised to benefit if borrowing costs decrease.

As many experts in Australia expect substantial interest rate cuts in 2024 and 2025, the easing headwinds of debt costs could pave the way for earnings upgrades after two years of downgrades.

The potential for interest rate cuts in 2024 offers a promising outlook for unlisted property trusts and their investment opportunities, further bolstering investor confidence and setting the stage for renewed growth.

But as always…

As players in the market eagerly await the RBA’s rate announcements throughout the new year—as well as analysing the multitude of global economic shifts—one criteria for real estate investors remains crucial: stick to property fundamentals.

Whether investing alone or investing with a team of experts, there is no better safeguard for positive, lasting returns than to ensure your investment, and your hard-earned capital, will remain protected against the fluctuations of interest rates and the turn of global events.

Investors and industry players alike are gearing up for what could be a transformative year, where interest rate dynamics play a pivotal role in shaping the trajectory of the unlisted property trust landscape. But it remains the individual investors’ responsibility to choose investments that are safe, secure and strategic.

Want to find out what we offer our investors? Get in touch with us today.