Australia's Real Estate Investment Trusts (REIT) sector is enjoying improving fundamentals and strengthening capital markets, but the disconnect between listed valuations and private market pricing is accelerating, delivering the prospect of above-average income and total returns for investors, Dexus (ASX:DXS) said in a report on Monday.

Australian REITs reported good operating performance and improved rental growth during the recent reporting season. The Dexus AREIT Fund had a yield of 5.87% for the period ending February.

The return of capital flows to real estate markets across the Asia-Pacific region saw Australia and Japan emerge as key beneficiaries of the moves away from the US. Domestically in Australia, large asset owners remain structurally underweight in property, per the report.

Access to debt markets for these REITS has improved over the past year, loan margins have compressed, covenants have eased or been removed at no additional cost, and debt tenors have been extended. Banks have become more active lenders to the sector, and dividend reinvestment plans are being used selectively to invest capital into new opportunities.

Elevated construction and statutory costs remain a defining feature of the current real estate cycle, and landlords with well-located, high-quality portfolios are benefiting. Sales growth in the retail sector remains robust, supported by strong consumer spending and improving retailer profitability. This supports a resilient and durable income profile for retail-focused REITs.

Suburban office markets remain challenged, while prime office asset valuations are now materially below pre-pandemic levels. Many industrial assets remain under-rented relative to market levels. Residential markets continue to benefit from strong population growth and persistent supply constraints, with the affordable housing remaining the most active segment, supported by state and federal policy initiatives.