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scott barlow

Real estate investment trust category is as attractive as it’s been in recent years based on trailing price earnings ratios.G0d4ather/Getty Images/iStockphoto

The domestic real estate investment trust sector never regained the heights hit just before the taper tantrum of 2013 and, with the U.S. Federal Reserve threatening to tighten monetary policy in December, the sector is once again under pressure.

The performance history of the industry, however, suggests fears are overdone. The S&P/TSX REIT Index has fallen 9.2 per cent since late July, reflecting fears that a U.S. Federal Reserve rate increase will push Canadian bond yields and borrowing costs higher, and also make bond investments more competitive with income-generating REITS.

But a potential interest rate hike by the Fed still leaves domestic REITs with a huge distribution yield advantage over bonds, even if government of Canada bond yields climb with their U.S. counterparts. In addition, the sector is as attractive as it's been in recent years based on trailing price earnings ratios.

The first chart shows the performance history of the S&P/TSX REIT Index against its distribution yield advantage over government of Canada bonds. The grey line represents the extra income available in REITs by subtracting the bond yield from the index yield. Currently, the annual income yield for the index is 5.8 per cent, and the five-year bond yield is 0.7 per cent, so the last data point on the chart shows the difference, 5.1 percentage points, on the chart.

The orange line on the chart shows the forward two-year simple return (not including income) for the index. For example, the first data point on the orange line indicates that between October, 2006, and October, 2008,