The Capital Spectator (via Abnormal Returns) points out something very interesting about U.S. real estate investment trusts: Their yields are about equal to those on the 10-year U.S. Treasury bond.
You can thank surging units prices for the collapse in the spread. Since the stock market bottomed out in March, 2009, the MSCI U.S. REIT index has gained an amazing 213 per cent after factoring in dividends, or about double the pace of the broader S&P 500 index over the same period.
As REITs have risen in value, their yields have fallen to just 3.3 per cent, as of Wednesday. By comparison, the yield on the 10-year government bond is 3.2 per cent. What this means is that investors aren't receiving anything extra for branching beyond government bonds, which is odd given that REITs certainly don't rival U.S. government bonds for safety. Traditionally, REIT investors received a premium over government bonds.
Capital Speculator figures that this isn't good news for REIT investors. "In absolute and relative terms, performance has been on a tear. But when we look at REIT yields, it's easy to turn cautious," the blogger said. "Relative to a 10-year Treasury, the traditional yield premium in REITs has evaporated lately. That's a sign that the asset class may be headed for rough waters."
According to the blogger, REITs have tended to sell off when the yield premium hits zero or enter negative territory (meaning that REITs yield less than bonds).
"The last time REIT yields slipped below the prevailing rate on the 10-year Note during the spring of 2010, a wave of selling descended," the blogger said. "For instance, the Vanguard REIT ETF was trading well above $52 a share in late April, 2010. At the time, there was little or no yield premium for REITs, according to data from NAREIT. By early July, the ETF had shed nearly 20 per cent.
"Previous episodes of negative REIT yield premiums over the years have also brought lower prices."
David Berman