Following on from part one, which provided a timely overview of the A-REITs sector and some insights into how it works, here's part two, which looks at what to expect from the sector this reporting season, and some of the stock's worth keeping on radar.
While listed property stock prices have responded favourably to stabilising valuations and a lower interest rate environment, the mission now facing would-be investors is to sniff out those A-REITs most likely to outperform their peers over the next 12 months or more.
The larger stocks within this sector appear to have benefited from improving market conditions, with the S&P SAX200 A-REITs Index up around 20% since early April.
In light of falling interest rates, improving valuations, and structural tailwinds like population growth, analysts are projecting 5% plus earnings growth in FY26, and over 6% in FY27.
That’s great news, but not all list property companies were born equal.
Certain stocks within certain pockets of the sector look better placed to bring home the bacon over the next 24 months.
Finding market opportunities
So with that in mind, what REIT’s looked better placed to benefit from mid-term growth?
Given that REITs as a sector – like a lot of listed sectors – is trading at a 20% premium to long-term average, Grant Berry, portfolio manager at SG Hiscock & Company urges investors to keep their eyes on mid-cap to small-cap stocks, offering high quality real estate with earnings growth potential that are trading at a discount to asset backing.
While the earnings growth outlook for the A-REIT sector at large is better than it’s been for some time, Pete Davidson, Pendal Group’s head of listed property, urges investors to follow current supply and demand dynamics.
For example, he expects industrial rent growth to slow down but still remain positive, retail to continue showing good earnings growth, while office will show flat earnings but with valuations holding up relatively well.
“Balance sheets are in good shape, gearing should be flat, and interest cost headwinds should be abating,” he notes.
Heightened corporate activity
Meantime, while continued rate cuts and the roll-off of finance hedging are expected to underscore improved earnings, UBS analyst Tom Bodor reminds investors that a more dovish rate cut path could trigger greater corporate activity – notably more M&As - across the sector.
Given how easy it is for retailers investors to get spooked, Bodor warns them not to over react to stocks like Goodman Group (ASX: GMG), Stockland (ASX: STO), Mirvac (ASX: MGR) and Vicinity Centres (ASX: VCX); or Lend Lease (ASX: LLC) and Dexus (ASX: DXS) – which face their own specific challenges – by selling down their entire sector.
With interest rate cuts creating a pivot back to growth for the sector at large, Bodor also urges investors to keep the often overlooked mid-cap passive A-REITs on radar.
Take note of the outlook
Beyond earnings quality, another core driver to keep on radar this reporting season, adds Pendal’s Davidson, is the underlying commentary – notably the outlook statements – that accompany it.
According to Macquarie Equity Research, the guidance given for 2026 and beyond will drive a divergence in performance.
In other words, while some A-REITs continue to return growth, others will continue to face headwinds.
The broker expects interest rate hedging to be a significant contributor to the divergence in earnings growth outlook” for the FY25-26 year, with only a handful of groups expecting their debt cost to fall.
Within its latest review of 24 listed A-REITs, Macquarie flagged a few stocks that could potentially outperform overly modest consensus expectations.
However, rather than just looking for A-REITs likely to beat expectations during August’s reporting season, the broker urges investors to seek out those with durable earnings potential and valuation upside, even if they report results that fail to excite the market.
Five dark horse A-REITs to keep on radar
Five A-REITs that Macquarie suspects may surprise this earnings season include:
Lendlease (ASX: LLC)
Given that last year included capital recycling gains that will not repeat, Lendlease was flagged by Macquarie for its downside risk.
The broker forecasts FY26 earnings guidance of 27.5 cents per share, 16% below consensus.
While the A-REIT has several key development milestones in play, including the One Circular Quay project, they will not necessarily contribute to earnings until FY27.
Meanwhile, consensus forecasts have recently been trimmed by 17.5% in recent months, and further revisions may follow.
National Storage REIT (ASX: NSR)
Macquarie expects FY26 guidance of 13 cents per share, which would represent a 10% year-on-year increase.
Macquarie has a target price of $2.44 and sees the potential for 5% of further upside.
Underscoring potential growth is an increase in revenue per available metre (REVPAM) and the rollout of an additional 200,000 square metres of net lettable area.
If leased effectively, Macquarie suspects that the pipeline could add $38 million in incremental revenue.
Arena REIT (ASX: ARF)
Macquarie sees this early learning centre specialist as a steady operator that is expected to continue delivering upside.
The broker expects FY26 guidance for earnings per share to come in at 19.6 cents, slightly ahead of consensus.
This forecast is based on an expected $95 million in development completions and no acquisitions.
Scentre Group (ASX: SCG)
During reporting season, Macquarie expects Scentre Group to guide to higher than expected FY26 earnings.
The broker also expects funds from operations (FFO) per security to beat current consensus by around 2.5% at 24.3 cents for FY26.
Macquarie expects upside risk to consensus earnings forecasts to be driven by A) better than expected portfolio income growth, B) disciplined cost control, and C) a modest improvement in funding costs.
While Macquarie maintains an Underperform rating based on valuation, the broker believes near-term earnings momentum could end up challenging the prevailing cautious view, especially if it is supported by the company's FY26 guidance.
Interestingly, earnings expectations for Arena have already moved higher, with consensus estimates up 4.6% in the past three months and Macquarie thinks this will continue to rise.
Macquarie's price target is $3.96, slightly above the current share price of $3.77.
DigiCo Infrastructure REIT (ASX: DGT)
Despite being excluded from Macquarie's earnings momentum list, the broker believes DigiCo - which focuses on digital infrastructure assets - has the most compelling valuation upside.
The broker has an outperform rating and a price target of $4.35, compared to a current share price of just $3.25 at the time of writing - which implies over 30% upside.
Unlike most of its peers in the A-REITs space, DigiCo growth drivers are specifically wired to demand for data, connectivity, and digital assets.
While earnings are less likely to shoot the lights out in the next quarter, long-term cash flow visibility and capital deployment optionality mean this A-REIT could outperform over the longer haul.
This article does not constitute financial or product advice. You should consider independent advice before making financial decisions.
