Standard and Poor's Fund Services (S&P) expects to see more mergers, acquisitions and public listings in the Australian real estate investment trust (A-REIT) industry next year.

"I think the sector has rectified some of its balance sheet issues and is looking for opportunities," S&P fund analyst Peter Ward said.

"The sector is expected to be driven more by real estate fundamentals than balance sheet, liquidity, and credit-related issues," he said.

During the financial crisis many funds saw their share price drop sharply on concerns over debt levels.

As a result funds had to raise capital to reduce their debt, but these balance sheet restructurings are now largely over, Ward said.

A-REITs have become more conservative and rely more on rental income for their cash flow.

Dividends are also better aligned with a fund's underlying free cash flow.

Ward made the comments on the back of S&P's recent review of the listed property sector, which analysed 69 funds.

Although the sector still lacks a five-star fund, the number of four star ratings has increased since the last time the review was conducted.

S&P upgraded a number of MLC and BT funds from three to four stars.

"It is a reflection of our conviction that managers will generate returns in excess of their objectives, and seek opportunities in the sector," Ward said.

S&P also withdrew the ratings on 33 funds, includings A-REITs offered by ANZ, ING and Colonial First State.

"The funds that you see there are probably more the derivative funds, not the headline funds," Ward said.