Higher rates have historically spelt bad news for commercial property investors. With the RBA recently raising rates for the fourth time this year and 10-year government bond yields climbing to 5.4%, rising rates are indeed the main theme at play in this space. Rates are central to all valuations: every office tower, shopping centre and warehouse is priced against long-term bond yields, which move with the RBA’s cash rate.
So, how can commercial property investors best navigate this tightening cycle?
The good news is that higher rates are not hurting every property, or every property fund, equally. Knowing where the damage sits is the key to generating solid returns from here.
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Commercial property has long been valued by capitalising its rental cash flows.
Valuations are very sensitive to the capitalisation rate used.
After all, when investors can earn more than 5% from a government bond, they demand a higher yield from commercial property, which pushes valuations lower unless rents rise by enough to offset this impact.
Property yields against cash and bonds. Source details shown on chart.
That’s why the A-REIT sector has underperformed as bond yields have risen, even though most trusts have reaffirmed or lifted their guidance.
The shift has been dramatic.
This year’s four rate rises, totalling one percentage point, have been a sharp reversal after three cuts in 2025, and have reset the maths for the entire commercial property world.
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The RBA cash rate since 2020. Source details shown on chart.
The RBA has signalled there’s little relief in sight. ‘Inflation remains elevated and some of the upside risks flagged in August are materialising,’ the board said in its September statement.
CommBank concurs. It doesn’t expect rate cuts until August next year at the earliest.
Office: Quality Wins, Everything Else Waits
Office is currently a mixed bag with vacancy rates high and rising.
National office vacancy reached 16.1% in June, but premium and A-grade space sat at 10.2% while non-CBD markets hit 18.9%.
‘It remains a story of quality and location,’ Property Council of Australia chief executive Mike Zorbas said.
Office vacancy by grade and market. Source details shown on chart.
Centuria Office REIT’s recent results fleshed out the themes at play.
Its FY26 accounts showed a capitalisation rate of 7.04%, up 16 basis points, gearing of 43.7% and FY27 distribution guidance of 9.0 cents, down from the 10.1 cents paid in FY26. With its units trading at $0.82 at the time of writing against net tangible assets of $1.66 at 30 June, a 51% discount, the market is pricing in a lot more pain than the valuers.
Unlisted office funds face the same pressures. But with no market price, valuation downsides show up slowly as valuers revise their numbers lower.
Retail and Convenience: The Quiet Achievers
Retail has been the sector’s steadiest performer this year.
For example, Charter Hall Retail REIT lifted its net tangible assets 8.4% to $5.03, its cap rate firmed 29 basis points to 5.45%, occupancy reached 99.1% and gearing sits at 30.9%. It is guiding to 3.5% distribution growth. That’s a solid result considering the rise in rates.
Non-discretionary tenants and fixed rent increases are clearly doing what bonds can’t right now: growing income.
Industrial and Data Centres: Growth with a Different Risk
Industrial is still growing, although it is not immune from the risks.
For example, Goodman Group grew its FY26 operating profit 15.7% to $2.67 billion, with $19.7 billion of work in progress, 78% of it in data centres, and gearing of just 6.5%.
However, its share price has not kept pace which reveals that sector sentiment has been weaker.
It’s also noteworthy that investors are now pricing industrial REITs like Goodman partly as AI infrastructure plays, so their fortunes are increasingly tied to hyper-scaler spending.
One of the more potent impacts of higher rates is that they expose the structures beneath commercial property funds and ETFs.
Case in point: in late September, Metrics Credit Partners froze redemptions in two unlisted wholesale funds, including its Real Estate Debt Fund, after its auditor, KPMG, could not sign off on the accounts of its listed trusts. The listed Metrics Real Estate Multi-Strategy Fund, now suspended from trading, cut its net tangible assets by 12%.
ASIC commissioner Simone Constant warned that some private credit investors may be exposed to this same type of valuation and liquidity risk ‘through structuring, hidden leverage or complex liquidity management practices.’
The issue is that whilst listed prices respond to risks like these immediately, unlisted fund valuations are revised only periodically.
That’s one of the main reasons why listed markets are marking down commercial property prices faster than for their unlisted peers.
Discounts to asset backing across listed property vehicles. Source details shown on chart.
The lesson is that unlisted valuations tend to lag listed prices, while redemptions can be frozen when too many investors want their money back at once.
We see three key steps to generating solid commercial property returns in this environment:
Start with your core exposure.
Broad A-REIT ETFs such as the Vanguard Australian Property Securities Index ETF (VAP), SPDR S&P/ASX 200 Listed Property ETF (SLF) and VanEck Australian Property ETF (MVA) provide cheap, liquid exposure to commercial property.
Hedged global exposure through the VanEck FTSE International Property (Hedged) ETF (REIT) also reduces reliance on one rate cycle.
Time to think opportunistically.
As the NAV discounts above show, the gap between the strongest and weakest listed property vehicles is unusually wide right now.
That suits active property securities funds such as the Resolution Capital Global Property Securities Active ETF (RCAP) which can avoid stretched balance sheets and buy quality assets trading while they are on sale. They may well spell opportunity.
And finally, being liquidity aware has rarely been more important.
Unlisted funds such as the Charter Hall Direct Long WALE Fund and the Dexus Australian Property Fund offer smoother reported returns, but investors should check their gearing, debt expiry, lease length, valuation frequency and how redemptions work before committing money they may need.
Be conscious that capital tied up in unlisted property funds is likely to require a long-term (7 year+) investment horizon.
Higher rates have become central to the commercial property investing game. Returns now need to come from income that grows and/or assets bought at a genuine discount to their fair value. It’s a simple but challenging equation.
The commercial property investors most likely to earn solid returns will be focused on moderate gearing, long leases with fixed or inflation-linked increases, and sectors where tenants need the space. They will treat steep discounts as a prompt for research rather than an automatic bargain, and match fund liquidity terms to their own time horizon.
Why Do REITs Fall When Interest Rates Rise?
Higher bond yields raise the return investors demand from property, which lowers valuations, while higher borrowing costs reduce distributable income for geared trusts.
What Is a Capitalisation Rate?
It is a property’s net income divided by its value. A rising cap rate means lower values for the same rent.
Are Unlisted Property Funds Safer Than A-REITs?
They appear less volatile because they are valued less often, not because the underlying risk is lower. They can also restrict redemptions in stressed markets.
Which Property Sectors Hold Up Best When Rates Rise?
Assets with strong tenant demand and growing rents, such as convenience retail, prime office and well-located industrial, have recently held up best operationally.
Vanguard Australian Property Securities Index ETF seeks to track the return of the S&P/ASX 300 A-REIT Index before taking into account fees, expenses and tax.
The SPDR® S&P®/ASX 200 Listed Property ETF seeks to closely track, before fees and expenses, the returns of the S&P/ASX 200 A-REIT Index.
MVA gives investors exposure to a diversified portfolio of Australian REITs. MVA holds a minimum of 10 Australian REITs, with a maximum weighting of 10% for each REIT. This fund aims to provide investment returns, before fees and other costs, that closely track the returns of the Index.
REIT ETF gives investors access to a diversified portfolio of international REITs with returns hedged into Australian dollars. This fund aims to provide investment returns, before fees and other costs, which track the performance of the Index.
The Fund invests in a select number of global listed real estate securities, with the aim of providing income and capital growth over the long term.
An unlisted property fund with an established and growing portfolio of predominantly long WALE properties diversified across geographies and sectors.
The Fund aims to provide investors with income and long-term capital growth through access to a portfolio of property investments.
Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
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