Well, it's official. The Reserve Bank of Australia (RBA) has cut interest rates for the second time in 2025. The RBA's decision today lowers the cash rate by 25 basis points to 3.85%, coming off the 25-point cut we saw back in February. It is only the second time since 2021 that Australians have seen an interest rate cut.
Interest rate cuts have profound economic and financial consequences. The most obvious of these is, of course, a reduction in interest that most mortgage-holders have to pay on their loans. But there are others. For example, Australians who have a significant amount of cash invested in term deposits or savings accounts will see the interest they enjoy on these investments drop.
But interest rate cuts also affect the share market.
When rates are high, the appeal of owning shares reduces, as many investors prefer to keep money in 'safer' investments like term deposits and government bonds when they can get a relatively high rate of return on their money. This can cause capital to move out of the share market and into our banks and government bonds.
But the opposite is also true, and when rates fall, the appeal of investing in shares rises.
This is often a rising tide that lifts all boats on the ASX. But one sector that might benefit more than most from this easing is ASX real estate investment trusts (REITs).
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Why do REITs benefit from interest rate cuts?
REITs are a rather unique investment class on our share market. To qualify as a REIT, an investment needs to fulfil certain criteria, such as being a property-based vehicle constituted as a trust.
REITs are also required to pay out the vast majority of their income to investors each year. They are also not required to pay tax as a company is, which explains why the dividend distributions that they pay usually don't come with franking credits attached.
So why would REITs benefit more than other ASX shares from an interest rate cut?
Well, REITs typically use far more leverage (borrowed money) than other ASX shares. This makes sense, as they almost exclusively own property assets. And taking out mortgages to buy property is not exactly uncommon. This means that interest rates have a far larger impact on the profitability of these investments than other ASX shares.
This is why REITs were among the hardest hit investments on the ASX when the RBA began its rate-raising cycle in 2022. But is the opposite true now that rates are coming down?
Time to buy an ASX REIT?
It might seem so. However, it's not as simple as some may hope. Although the RBA has just delivered its second rate cut of the year, investors have been expecting these cuts for a while now.
As such, the share prices of popular REITs have already been climbing as a result. Take Westfield operator Scentre Group (ASX: SCG). Its unit price has risen by 13% over the past 12 months, and is up by more than 50% since October 2023.
The Charter Hall Long WALE REIT (ASX: CLW) has risen by just over 28% since then as well. And Goodman Group (ASX: GMG), an investing favourite on the ASX, has soared more than 58%.
Now, this doesn't mean that it's not a good time to buy an ASX REIT. There still might be more interest rate cuts in 2025. And if rates stay relatively low for the next year or two, it would certainly bode well for these investments. However, investors still need to take a look at each individual REIT they might want to buy, and see if the investment case stacks up for them.
