October 2026
In recent months we have seen elevated domestic interest rates, challenging macroeconomic conditions, taxation policy intervention and global geopolitical instability start to meaningfully influence the Australian economy.
This confluence of events, coupled with persistently high inflation since 2023, is creating real estate and capital dislocation in the markets in which LF and our investors participate.
The commercial property market is moving through a period where patience and discipline will become increasingly important.
While many investors are focused on this short-term uncertainty, we see a market that is gradually creating the conditions where the highest quality assets will continue to outperform and attractive acquisition opportunities may present.
We are, as ever, alert to how these conditions can affect real estate assets, and we are also excited about the opportunities these markets can present to considered and informed investors.
Capital Markets Are Still Driving the Story
Listed property markets have already undergone a significant repricing, with A-REITs trading at material discounts to their underlying asset values. Historically, listed markets have tended to move ahead of direct property markets, suggesting that the full impact of higher interest rates and increased capital costs may start to be seen in cap rate softening for certain markets in the coming 6-12 months.
At the same time, higher bond yields and elevated borrowing costs are reshaping the investment landscape. The period in which asset values were supported primarily by declining yields and low-cost debt has passed. Looking ahead, and consistent with LF’s approach, investment performance is expected to be driven by income growth, proactive asset management and disciplined capital allocation.
Increasing Pressure on Capital and Refinancing
We are also seeing growing pressure across parts of the private credit and development markets. Higher debt servicing costs, refinancing challenges and tighter lending conditions are creating stress for some owners and developers, along with continuing elevation of construction costs. Recent events across the property sector serve as a reminder that access to capital can no longer be assumed. As financing conditions tighten, some asset owners are being forced to make decisions based on balance sheet requirements rather than the quality of the underlying property.
Look After Your Tenants as Business Conditions Change
Tighter business conditions adjust tenant decision making and lead to a greater focus on occupancy costs as well as how property can drive business performance. While vacancy in our portfolio is extremely low, we have observed leasing conditions softening for certain properties in specific markets, with tenant decision making – particularly for expansion – taking longer.
That may sound negative, but in fact we believe there remains strength in the leasing markets of our focus sectors – retail, industrial and office – for the best quality assets holding competitive advantage for occupiers.
We grow value for investors and drive our income returns from the performance of our tenants. Working closely with tenants to understand their businesses, and how our property can work best for them, leads to greater tenant retention and rental growth outperformance compared to competition.
Opportunities Often Come from Seller Motivation, Not Weak Assets
Importantly, periods such as these often create the best buying opportunities.
Historically, attractive acquisitions have emerged when quality assets become available due to debt maturities, covenant pressures, fund redemptions, capital recycling programs or refinancing requirements. In many cases, the asset itself remains fundamentally strong, but the ownership structure requires action.
We believe investors who have access to capital and the ability to be patient will be well positioned to take advantage of these situations as they arise.
Fundamentals Matter More Than Ever
While broad sector trends remain important, we believe the distinction between prime and secondary assets is becoming increasingly significant.
Our focus remains on the fundamentals of each individual opportunity, including:
– Tenant quality and covenant strength.
– Durability and growth of income.
– Asset quality and strategic positioning.
– Supply and demand dynamics within the local market.
– Value-add potential and active management opportunities.
– Multiple exit strategies and long-term buyer appeal.
In our view, the next cycle will reward quality assets and strong property fundamentals rather than passive exposure to a particular sector.
As a result, we remain disciplined in our approach, prioritising selectivity, capital preservation and long-term value creation.
We are actively reviewing opportunities as they arise and expect to see availability of an increasing number of properties in the coming months which align with LF’s investment philosophy of acquiring high-quality assets underpinned by strong income, resilient tenant covenants and attractive long-term fundamentals. The experience of our team reinforces that the most opportune time to invest in the best quality assets is at times of capital dislocation and we believe this next period has the potential to deliver significant opportunities for LF’s investors.
LF Core Trust – Brand new facility built in 2023 for ASX listed BlueScope Steel
If you have any investment requirements and would like to explore how we may be able to assist, please feel free to reach out to our Investor Relations Manager, Fiona James at fiona@leytonfunds.com.au.