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The dividend yield on the S&P/TSX Real Estate Investment Trusts Index is currently 420 basis points higher than the five-year Government of Canada bond yield. Based on these relative yields, regression analysis predicts a return close to 12 per cent for REIT investors in the coming year.

For REITs, the "yield over Canadas" – the amount by which the REIT distribution yield exceeds government bond yields – is an essential component of performance. REITs are most attractive and perform best in periods like 2009 and 2010 when the distribution yield is well above bond yields.

The scatter chart below shows the effects of relative yields on the performance of the S&P/TSX REIT Index over the past six years (which is as far back as the data goes).

Each data point shows the yield differential and 12 month forward return for the REIT index. For example, the highest data point on the chart (it's from December 2008, but dates are not plotted in this type of analysis) shows month-end data when the REIT index yielded 9.5 per cent more than the five-year bond (vertical axis), and the forward twelve-month performance from that point was a 42.6 per cent appreciation (horizontal axis).

If the same patterns hold, we can estimate a return for the REIT index for the next twelve months. The current yield spread between REITs and government bonds is about four per cent. So, if we move up the vertical axis to four, then slide right over to the trend line, it intersects with the horizontal axis near six per cent.

This suggests that the REIT index will climb six per cent – not including dividends – based on where yields are now. Add the 5.9 per cent yield, and we can estimate an 11.9 per cent total retrun for the S&P/TSX REIT Index.

Again, this forecast depends on the relationship between bonds and REITs to remain roughly the same as they've been for the past six years – the regression is definitely not a guarantee that our target will be reached. Still, REIT investors concerned about rising interest rates should take comfort in the historical trend.