Don’t Miss This Explosive REITs Trade Setting Up Right Now

It's time to get excited about REITs again.

It's not the talk of the town yet. But pretty soon, you'll be hearing about the magic of Real Estate Investment Trusts REITs.

Of course, when your Uber driver talks about it, it'll be time to sell.

Smart punters will spot this trade coming and position early. They'll have made the trade and will step out of that Uber ride with a smug, self-congratulatory smile.

The REIT trade is coming. It's undeniable and unstoppable.

You see, it all comes down to basic math.

The market is expecting interest rates to start falling again this year. That means lower debt cost and lower comparative investment yields. That's a double whammy that could get REITs soaring again.

But the path of interest rates is never guaranteed.

World events could throw us curveballs. Inflation, unemployment and geopolitics leave their dirty fingerprints over these decisions.

We'll examine exactly why this trade could play out and some ways that savvy traders might play it. But first, you might be wondering what the hell REITs are and what interest rates have to do with anything.

So, let's address that first.

REITs, How They Work, and What They Do

REITs, or Real Estate Investment Trusts, are the vegetables of the investing world. Bland and boring.

There's no fancy tech or diseases cured. And they won't get you a 1000% return in a year - sorry, crypto fans, this one might not be for you.

Some of us can't afford an office tower or a sprawling logistics centre on our own. Just like we can't afford to buy all of BHP or CSL.

REITs bring large-scale, income-generating properties within reach of regular investors. It's much the same as listed companies. Except, the smallest unit of ownership is called a 'unit' instead of a 'share'.

They differ slightly from shares, and some special rules apply. Especially when it comes to tax time.

One key difference is that trust distributions get taxed in the generating income year. Not the year you receive the payment.

Take a standard company paying its final FY25 dividend in September 2025. You'd record that dividend in your FY26 return when the money hits your account. But, for a REIT, that September 2025 payout is usually declared in your FY25 return. That's because the income isn't retained by the trust itself and needs to be passed on.

As far as trading goes, buying or selling a REIT on the ASX is the same process as trading shares. They have a ticker. Just log into your broker platform and place an order.

REITs generally pay out over 90% of their earnings each year. That arrangement lets them skip paying taxes at the trust level. So, distributions are typically unfranked. This high distribution makes them popular with investors seeking stable income.

REITs offer investors access to high-quality property investments. But with added liquidity, accessibility and diversification.

The Interest Rate Double Whammy

Interest rates are central to REIT performance for two main reasons.

First, REITs use debt to fund acquisitions and development. They might borrow money to build a new shopping centre or refurbish an old office block. The best REITs leverage debt well to amplify returns.

The simplest way to think of REIT performance is Rent + Capital Growth - Cost of Debt.

That margin of their return over the cost of the debt is a key performance driver.

Like listed companies, REITs vary in how much debt they have on the books. They also use hedging to various degrees. So interest rate change impacts vary.

Second, investors value REITs against alternatives. Every investor compares potential returns across various assets.

If you can park your cash in a savings account and get 4%, you might not want to risk your money in a REIT that pays 5% or 6%. The risk premium might not feel worth it.

But if that savings account rate plummets to 1% or 2%, then a 5% or 6% yield from a REIT looks amazing in comparison.

Those two factors combine to create a "double whammy" effect for REITs.

They pay less in interest, boosting their bottom line and allowing growth. They also become more attractive to yield-hungry investors. This dynamic can be rocket fuel for REIT prices.

We've seen this happen before. During periods of rate cuts, REITs get renewed attention. This surge in demand can create strong revaluations.

Of course, if rates rise, the opposite can happen. But right now, we appear to be entering a cutting cycle.

It's important to remember that once cuts begin, they'll quickly get factored into REIT prices. It's the quick and the dead out there, and you don't want to be fumbling with your gun when the other guy is getting shots off.

What's Happening with Interest Rates

The Reserve Bank of Australia might cut rates soon. Perhaps even as early as 18 February, the next meeting.

Some point to rising economic headwinds, global uncertainty, and the need to soften the blow on businesses and consumers as reasons to move quickly.

But is that realistic?

Core inflation is still hovering above the RBA's comfort zone. Unemployment hasn't shot up. Growth is weaker than before, but not exactly in freefall.

Then there’s the complications.

Trump's tariffs could stoke inflation on a global scale.

The peace deal between Israel and Hamas could halt the Houthi rebel attacks on shipping and a return to mass transits in the Suez Canal.

This would shorten global supply chains and have the impact of a sharp spike in global output. That could push oil prices down, ease inflation, and give central banks more leeway to cut rates.

The RBA might delay slashing rates. There's a strong argument against a February cut.

But it's a case of when not if. Cuts this year seem all but inescapable.

The big reason to cut is a morose China, ever more threatened by Trump tariffs. This has obvious flow-on effects on our iron ore conglomerates.

REIT Sectors

Different REITs focus on different property sectors, and each sector has its own outlook.

Office property is the biggest question mark right now. Vacancy rates are high with flexible work setups still popular. Some companies are scaling back their office footprints or reconfiguring for hybrid work. That can dent the rental income of office-focused REITs, putting them under pressure.

Retail is a mixed bag. High-end retail is faring okay, especially in premium locations with robust foot traffic. Smaller suburban malls and outdated shopping centres are under pressure. Some REITs have adapted, turning large retail spaces into mixed-use facilities with gyms, childcare, entertainment, and dining. These transformations can help keep foot traffic steady.

Industrial and logistics remain strong, driven by e-commerce and the need for more warehouse space. If you're shipping out thousands of packages a day, storage is a must.

Data centres and technology infrastructure are also interesting areas. Those REITs can enjoy the digital economy's continued expansion.

Residential property has been performing very strongly. Demand for affordable housing, in particular, has been a star performer. Think holiday parks and lifestyle villages.

ASX REIT Sector in Cutting Cycles

The performance of REITs during cutting cycles is well documented. When rates trend down, REITs tend to do well. The cost of debt declines, boosting profitability. Investor appetite ramps up as the yield differential becomes more appealing.

We saw it in the early 2000s and again after the Global Financial Crisis when rates dropped to low levels. REITs staged an impressive comeback once borrowing costs started falling, and the economy began to pick up.

During those times, some REITs doubled in value over a short period. All the while paying out their distributions. That's the kind of scenario that gets investors salivating. Quick growth and good yields all in one.

Of course, there's always a risk that if rates drop too far too fast, the economy might be in trouble. We are looking for an economic sweet spot with moderate easing. When inflation is manageable, unemployment isn't skyrocketing, and banks remain stable.

History doesn't always repeat exactly, but it often rhymes. If the RBA does decide to cut rates, and the global economic picture doesn't fall apart, the ASX-listed REIT sector could be set for a strong run.

This is why so many analysts keep a close eye on the signals from central banks. If you can pick a turn in monetary policy, you can position yourself in REITs ahead of the mass influx of capital that might follow.

ASX-Listed REITs for Your Watchlist

If you're curious about where to start, here are three REITs that deserve attention. Each has its own angle, but they all share a reputation for decent yields and an eye on growth.

Dexus (ASX:DXS) tends to focus on office and industrial properties. Yes, offices have some challenges.

But Dexus selects prime locations that remain in demand even in downturns. Their industrial assets benefit from the e-commerce boom. Dexus also has strong management and is adept at recycling assets for growth.

Charter Hall Group (ASX:CHC) spans multiple segments. Including office, retail, industrial, and social infrastructure like childcare centres and healthcare facilities. It's proven adept at raising funds for acquisitions. Its diversification will buffer against downturns in any one sector. Charter Hall is also known for stable distributions backed by predictable rent inflows.

Scentre Group (ASX:SCG) focuses on shopping centres. Particularly the high-profile Westfield centres in Australia and New Zealand. Scentre Group invests heavily in making malls more than just shopping destinations. Its adding dining, entertainment, and other services. These prime locations can keep foot traffic high compared to smaller strip malls.

Remember, each REIT has its own set of risks. Dexus needs to keep an eye on office vacancy rates. Charter Hall should maintain discipline across various property segments. Scentre must ensure its malls stay relevant.

But if you believe in the broader upswing for property once rates ease, these REITs deserve a place on your watchlist.

Final Thoughts

It's easy to get excited about REITs when central banks start talking about lowering rates. Cheaper debt is like rocket fuel for property investments.

Historical trends show that when interest rates move downward in Australia, the REIT sector often enjoys a lift.

If the rate cut does happen in February, it could spark a wave of new capital flowing into the sector.

But caution is also warranted.

Inflation and Unemployment are hardly screaming for a cu.

The global picture includes potential spanners in the works. Such as a tariff war and a fragile Middle East peace. That said, the best moves in investing often happen when you position yourself early.

Every REIT investor should pay attention to debt levels and the properties a trust owns. If a REIT is over-leveraged, it's riskier, even if rates are falling. If a REIT's portfolio is stuffed with outdated office buildings with high vacancies, it might underperform. But a REIT with modern buildings, quality tenants, and flexible strategies can thrive. Especially when borrowing costs drop.

In an ever-changing world, property is one of those assets people go back to time and again. It's tangible, necessary, and can generate steady income. The fact that Australian investors have a longstanding love affair with real estate only adds to the potential.

So, this is your call to action. Get your head around REITs and how they work. You never know, a few hours of research might just make your portfolio great again this year.