ASX REITs in 2026: Why is This Sector In Such a Sorry State? Here Are The 5 Reasons Why!

Imagine having a crystal ball in 2016 and seeing the state that ASX REITs in 2026 would be in. You couldn’t imagine investing a cent in it! Well, at least in any ETF tracking the space. Certain individual companies may be a different story.

But the top and bottom line is the same. The space is struggling due to Iran, but it is not as if it’d be sunshine and fairy floss if Iran didn’t happen. The reality is that the sector has never fully reclaimed its pre-COVID identity.

Over six years removed from the pandemic’s initial shock, the S&P/ASX 200 A-REIT Index continues to oscillate near breakeven against the broader market, offering modest differentiation when the capital-cycle tailwinds that once defined the sector (which we’ll address in this article) have either reversed or migrated elsewhere.

The most instructive data point of 2026 is the fact that AirTrunk, a homegrown hyperscale data centre operator, is preparing a REIT IPO in Singapore that could raise approximately US$1.5bn and value the trust at roughly US$2.5bn.

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ASX REITs in 2026 Are In a Sorry State And Here Are The 5 Reasons Why

1. Interest rates (and the Iran War)

At the heart of the issue of why REITs are struggling is interest rates. REITs are highly sensitive to the cost of capital because their valuations are effectively built on discounted future income streams.

When bond yields rise, those cash flows are worth less in present terms, and when interest rates increase, the cost of servicing debt climbs. This double impact compresses both valuations and earnings. Australian REITs entered 2026 already dealing with elevated rates after a prolonged tightening cycle, and many had balance sheets structured for a lower-rate world.

The Iran war has complicated this backdrop by injecting a fresh inflation shock into the global economy. Energy markets are the key transmission mechanism. Rising oil prices flow through to transport, construction, and operating costs, and in a country like Australia, which is exposed to global energy pricing, that effect is meaningful.

The consequence is not just higher inflation in isolation, but the policy response it forces. Central banks that were expected to cut rates are now either delaying those cuts or, in some cases, tightening further. For REITs, that shift is critical. The sector had been relying on a cyclical turn in monetary policy to stabilise valuations, and the war has effectively pushed that turning point further out.

This dynamic feeds directly into property valuations through cap rates. Investors demand higher yields on property assets when risk-free rates rise, which mechanically reduces asset values. This repricing is gradual but persistent, and it erodes net tangible assets across REIT portfolios. At the same time, higher financing costs reduce funds from operations, particularly for trusts with near-term debt maturities or higher leverage. The result is a squeeze on both sides of the balance sheet.

2. The Tough Macro Environment

The macro environment is also weighing on tenant demand. Higher interest rates and cost-of-living pressures are constraining consumers, which in turn affects retail tenants. Office markets remain structurally challenged by hybrid work trends, and that weakness has not been resolved.

Industrial and logistics assets continue to benefit from long-term tailwinds, but even those segments are not immune to valuation pressure when discount rates move higher. The Iran war exacerbates these issues indirectly by dampening confidence and reinforcing the risk of slower economic growth.

3. REITs are just unattractive

Another factor is relative attractiveness. REITs have traditionally appealed to investors seeking yield, but as bond yields rise, that relative advantage diminishes. Investors can now access comparable or better income from government securities without taking on property or equity risk. This has contributed to capital rotation away from REITs and into sectors that either benefit from inflation, such as energy and resources, or are less sensitive to rising rates.

What makes 2026 particularly difficult is the convergence of structural and cyclical pressures. The sector is still adjusting from peak valuations reached in the low-rate environment of 2021 and 2022, while simultaneously facing a macro shock that has reset expectations for inflation and interest rates. The Iran war has not created these problems, but it has removed the near-term catalyst that many investors were relying on for recovery.

4. Lingering impacts of COVID

The reality is that there are structural impacts to the market as well. It is not simply the case that if Iran hadn’t happened, the space would be rallying. The COVID effects on many sectors are continuing to linger.

Office REITs bore the most enduring impairment. Hybrid work normalised at roughly three days per week for knowledge workers across Sydney and Melbourne’s CBD markets. Leasing decisions contracted, floorplate requirements shrank, and vacancy rates in secondary office buildings remain elevated.

Industrial and logistics, briefly the sector’s hero category, also faced a recalibration as e-commerce-driven demand normalised and rental growth decelerated from unsustainable peaks. The whiplash underscores how quickly structural tailwinds become priced-in premiums.

Against this backdrop, the S&P/ASX 200 A-REIT Index returned 10.3% in FY25. Whilst this figure may appear reasonable in isolation, it trails the ASX 200 by a meaningful margin when risk-adjusted and viewed against a global context where digital infrastructure, healthcare real estate, and senior housing are delivering structurally superior growth.

The sector’s aggregate performance masks a significant gap: A-REITs are not capturing the asset classes where structural demand is most durable. Data centres, which represent the most compelling real estate opportunity of this decade, have been conspicuously thin on the ASX.

5. Australia’s Superannuation Has The Capital To Invest, But Doesn’t Want To

Australia’s superannuation system held >A$4.1tn in assets. It is one of the largest pools of institutionally managed retirement capital on earth, and it is structurally committed to real assets. Hang on? Shouldn’t that be a reason for this space to perform? Yes, but the reality is different.

It is true that super funds like property, but unlisted property is preferred. Data from the Australian Financial Services Authority shows that unlisted property is ~62% of their property exposure, versus listed A-REITs at 38%. Curiously is the inverse of their equity preference, where listed equities account for 92% of equity exposure versus 8% unlisted.

Why is this? Because super funds operate on long investment horizons and are sensitive to short-term valuation volatility. Unlisted property assets are revalued periodically, typically quarterly, insulating funds from the daily price fluctuations that occur in listed markets where sentiment, interest rate expectations, and equity market volatility all influence unit pricing. As UniSuper’s listed property disclosure notes explicitly, listed REIT returns are expected to be meaningfully different and more volatile than unlisted property returns.

This means that even though the domestic capital pool is so large, new-economy real asset exposure is pivoted through unlisted vehicles managed by institutions like Macquarie Asset Management, IFM Investors, AustralianSuper, and Aware Super. These managers build and hold data centres, logistics parks, and healthcare facilities outside the listed market. Public investors on the ASX receive limited secondary access to these assets.

Turning back to AirTrunk – this company is itself a product of this dynamic. Macquarie held AirTrunk before selling to Blackstone and CPPIB in a US$16.1bn announced in September 2024. That sale was the largest data centre transaction in Asia-Pacific history. It did not pass through the ASX.

AirTrunk hits the reality home

AirTrunk should be an Aussie success story, and it is in the sense it began at home and expanded abroad from there. But it appears to be listing in Singapore for a 10-figure IPO. To be fair, the reasons for the Singapore listing include several converging factors outside the ASX’s control such as greater investor and regulator familiarity with REITs, preferential tax treatment for foreign investors (on top of more favourable tax rates to begin with).

The ASX has one material data centre REIT: DigiCo Infrastructure REIT (ASX: DGT), which listed in FY24 and was the largest ASX IPO in nearly six years at a market capitalisation of approximately A$2.8bn. DGT was a meaningful step, but it remains a single vehicle with a nascent track record. It is not a comparable ecosystem like Singapore is.

Conclusion