The Globe and Mail reports in its Thursday edition that the S&P/TSX Composite Index Real Estate sector now yields 4.2 per cent, down from 5.1 per cent at the end of 2018, before the current rally kicked in. The Globe's David Berman writes that this marks the lowest yield in the three years since the sector was added to the broad index, and suggests that the best feature for REITs is no longer so compelling. Capital Economics expects that REITs will be caught in a broader equity downturn before the end of the year, as interest-rate cuts by central banks fail to improve the deteriorating global economy.
Investors generally hold REITs because the yields tend to be considerably larger than yields on safe government bonds, but the spread between the two yields can cause volatility. Just as rising bond yields in the fourth quarter of 2018 made REITs look less attractive, causing a REIT sell-off, falling bond yields in 2019 have spurred a 25-per-cent rally by REITs. Analysts at CIBC World Markets recently noted that rising valuations make REITs vulnerable to a setback. Based on estimated funds from operations, REIT valuations have climbed sharply this year to a level that is now above the historical average.
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