While the prospect of rising interest rates has dampened demand for real estate trusts globally, the sector could see a resurgence in Australia, Morgan Stanley said.
Interest rates have headed higher since the U.S. Federal Reserve last year first broached its plan to taper its asset purchases. Rising rates hurt interest in real-estate investment trusts, or REITs, as their yields become less attractive and they face a more difficult financing environment for acquisitions.
(Read more: 2014 a 'litmus test' for Australia economy: Goldman)
"In a rising interest rate environment, you want to be very skeptical and nervous about bond proxies," like REITs, Richard Titherington, head of global emerging markets at JPMorgan Asset Management, told CNBC last week.
But in Australia, interest rates may not be headed north.
"So far, Australian bond yields have risen in line with global bond yields," Morgan Stanley said in a note. "However, if Australian bond yields stabilize or fall as the RBA (Reserve Bank of Australia) keeps rates lower for longer (as is our macro view), it would be positive for the A-REIT sector."
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Morgan Stanley isn't the only one expecting lower rates. Goldman Sachs this week said it expects Australia's economic growth will slow to 2.0 percent in 2014 from an expected 2.5 percent in 2013. As a result, Goldman is forecasting the Reserve Bank of Australia (RBA) is more likely to cut interest rates than raise them this year, expecting a 25 basis point rate cut in March.
(Read more: Singapore's real-estate trusts fall out of favor)
With the gap between A-REIT (Australian real estate investment trust) yields and the 10-year bond yield already above average, a decline in bond yields could spur "significant" outperformance in A-REITs, both compared with the broader Australian stock market and the global REIT sector, Morgan Stanley said.
The bank also sees a possibility that international REITs may take advantage of recent Australian dollar weakness to acquire assets.
"Interest from international REITs in the Australian property sector has been close to zero in the last five years or so, as fundamentals were weak, the high Australian dollar made investments less attractive, and companies were generally focused on their domestic markets," it noted.
(Read more: Real estate funds no longer living on Easy Street)