The Bay Street financial district in Toronto on Aug. 5, 2022.Nathan Denette/The Canadian Press
This chart may unsettle a lot of real estate investment trust investors. It is important, however, to remember that this is only one perspective and there are other ways to evaluate the sector, dramatic as the implications of the chart may be.
The chart plots the yield advantage of REITs over Government of Canada bonds – the yield on the REIT index minus the five-year bond yield – for every month since the S & P/TSX REIT Index became available, and the resulting performance for the index in the following two years.
For example, look to the dot on the furthest right on the chart. It shows a time period (it’s December, 2008, but dates are not used on scatter charts) where the REIT index yielded 9.5 percentage points more than the five-year bond (X-axis) and the return on the index was 63.6 per cent for the two years afterwards (Y-axis).
The upward sloping trend line indicates that the greater the yield advantage from REITs relative to bonds, the better future returns became, in general.
REITs on average offer very little yield advantage compared with bonds in the current environment and that bodes poorly for future returns. The trailing 12-month yield on the REIT index is 4.3 per cent and the five-year bond yield is 2.9 per cent, making the differential 1.4 per cent.
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To find what the 1.4-per-cent number implies for future REIT returns we first find 1.4 on X-axis. Then, move eyes down to the trend line to see where it intersects with the 1.4 figure.
The news is not encouraging. There are three data points close to the trend line where it crosses near 1.4 per cent (they are all from 2007, but again, dates are not plotted on scatter charts). The yield differentials for the data points are 1.2 percentage points, 1.3 percentage points and 1.5 percentage points. The two-year cumulative simple (not including payouts) returns are minus-37 per cent, minus-33 per cent and minus-30 per cent, respectively.
Past performance trends do not, happily in this case, guarantee future results. Nonetheless, the average REIT yield compared with bonds is very low relative to history and investors in the sector should tread carefully as long as this is the case.