Nov. 3 (Bloomberg) -- The outlook for Australian real estate investment trusts has been upgraded to “stable” from “negative” by Moody’s Investors Service as the economy recovers.

“There are clear signs that the business conditions for the A-REIT sector are stabilizing, with Australia’s economy outperforming expectations of earlier in the year, and avoiding a recession,” Clement Chong, vice president of Moody’s corporate finance arm wrote in an e-mailed release.

Australia’s listed property companies have been struggling to return to profitability after the 16 members of the S&P/ASX 200 A-REIT Index reported combined losses of A$19.5 billion and writedowns of A$21.7 billion in the year to June 30, according to data compiled by Bloomberg.

The Reserve Bank of Australia raised its benchmark interest rate by a quarter of a percentage point for the second time in four weeks today as Australia side-steps the global recession.

The rate increase won’t dent Moody’s outlook, Chong said.

Hedging arrangements made when the central bank’s cash rate target was at a historic low of 3 percent, and recent capital raisings will help shield most property trusts from any direct impact from higher borrowing costs, Chong said.

The economic recovery will increase demand slightly, and asset values will bottom in the next 12 to 18 months, Chong said.

Supply of office, retail and industrial properties, which diminished as credit dried up during the financial crisis, will remain low, contributing to improved business conditions, Chong added.

Treasurer Wayne Swan said yesterday the economy will expand faster than he previously forecast, growing 1.5 percent in the 12 months to June 30, 2010. In May, he forecast a 0.5 percent contraction.

To contact the reporter on this story: Nichola Saminather in Sydney on nsaminather1@bloomberg.net

Last Updated: November 3, 2009 01:56 EST