Eight months ago the sector was yielding only 5 per cent and analysts were bullish about solid earnings growth and sound fundamentals as the supply pipeline continued to feed strong demand outside of former mining boom towns such as Perth and Darwin.

But Brexit – the UK's departure from the European Union – and the election of Donald Trump to presidency of the US herald a new era of lower taxes, bigger government spending, rising inflation, higher interest rates and, possibly, the end of a 35-year bull market in bonds.

"The smouldering flow of money coming out of fixed income markets over the last few months has turned into a small eruption since the US election," says Hasan Tevfik, equity strategist for Credit Suisse.

JP Morgan, another investment bank, predicts rising bonds yields will push more funds from bonds and other high-yield assets to better performing sectors.

Over the last three and five years, A-REITs have generated a return of about 16 per cent, or nearly three times the return of the S & P/ASX 200, the nation's leading share market index of the top 200 companies.

Yield-starved investors, who are struggling to get more than 3 per cent on fixed term deposit accounts, flooded into the sector, pushing up the funds' premium to net asset values, which means many investors were paying inflated prices.

But in the past three months the index for REITs has slipped as the broader market gained nearly 4 per cent.


Winston Sammut, managing director of Folkestone Maxim Asset Management, which has about $1 billion under management, reckons recent falls are creating buying opportunities because the "fundamentals are still very good" for top trusts. .

He's referring to trusts that are invested in blue chip properties with medium to long leases, regular rent increases equivalent to the consumer price index, good tenants and high sale prices, particularly in property hot spots like Melbourne and Sydney.

Sammut believes the sector has been over-sold on the strength of speculation about what the future US president might do, rather than what is happening. He adds: "We do not know what president-elect Trump is going to do until he takes over."

David Bryant, chief executive of Australian Unity, which has about $10 billion under management, says recent falls mean A-REITs are selling at "fair value" again.

"Yes they are near the top of the cycle, but this cycle isn't a circle – picture a long plateau at the top," says Bryant. "Things won't be at risk of a correction until interest rates rise, and although Trump's election in the US brings forward the start of their rate increase cycle, both there and here it will be very gradual and careful."

Capital market experts are debating the timing and size of a potential rate rise.

Martin North, principal of Digital Finance Analytics, a consultancy to banks and financial services companies, says the forward rates used by money markets suggest the rises could be as early as next year. Others claim the Reserve Bank of Australia will not raise the cash rate until 2018 "at the earliest".

These predictions assume no unexpected major disruption to the global economy.


Smaller lenders, which rely on international capital markets rather than deposits to fund their lending, are increasing borrowing costs on three- to five-year fixed deposit products by up to 60 basis points.

AMP's Oliver reckons A-REITs have been oversold after their slump since mid year and are due for a short-term bounce.

"But they are likely to remain relative underperformers as bond yields continue to drift higher in the year ahead. It's time for caution on A-REITs – either look for less yield-sensitive REITs or at other more cyclical sectors of the markets," he says.

Fund managers recommend trusts less sensitive to interest rate changes with diversified portfolios across retail, industry, commercial and residential, or specialist sectors where growth and returns are driven by demographic change, such as health care, aged care facilities and education.

Suggestions include Mirvac, Stockland and Goodman, although investors should seek independent, authorised advice.

For example, the share price of Mirvac, a diversified property group that both develops and manages properties, has slipped from about $2.30 to around $2 in the past eight weeks.

Stockland, another diversified property group with a deep balance sheet, has slipped from about $4.80 to $4.20 in the same period.

Investor checklist*

Does management follow its investment strategy?

Beware complicated financial structures as they increase risk, reduce clarity and add expense.

Is the performance fee based on a reasonable hurdle? Are there extra fees for raising debt, or are they included in the management fees?

Check the level of gearing. Experts generally advise against borrowing higher than 50 per cent in unlisted funds and 30-40 per cent in listed A-REITs. High gearing increases risks in a market downturn.

Do the assets have strong tenant covenants and long-term leases? Are they located in good positions and do they have quality cashflows?

Ensure you get regular updates on fund performance, assets and strategy to critically assess their management.

*Source: Folkestone Funds Management