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From May to August, the REIT index fell by 18 per cent, as investors stepped back from the sector.

Mark Blinch/Reuters

Globe editors have posted this research report with permission of Timbercreek Asset Management. This should not be construed as an endorsement of the report's recommendations. For more on The Globe's disclaimers please read here. The following is excerpted from the report:

Our bottom-up fundamental analysis currently suggests that global REITs are priced to deliver another year of positive total returns for 2018 in the range of 8 to 10 per cent. This return consists of a 4.6-per-cent cash flow yield and four-to-five-per-cent earnings growth driven by higher realizable rents as leases expire at below-current-market levels, completion of redevelopment and development projects currently underway and new accretive property acquisitions.

Today's market conditions look favourable for global real estate securities:

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  • Public market valuations are attractive, on an absolute basis, with global REITs trading at a 10 percent discount to NAV.
  • Global REIT valuations are attractive (if not cheap) versus equities, having underperformed global equities by 11.7 per cent in 2017, in addition to underperforming equities by 300+ basis points in 2016.
  • Dividend growth for global REITs has outpaced stock price performance over the past three years, and we believe growth in dividends will positively influence share prices in 2018.
  • Counterintuitively, REITs perform well in a rising-rate environment where better economic growth and low unemployment leads to stronger demand for commercial real estate space. REITs have generated a +13.5 per cent annualized total return in periods of rising interest rates, dating back to 1976.

In an environment where global equity markets are reaching all-time highs and fixed income faces higher interest rates, we believe that real estate offers an attractive source of alternative yield with growth potential expected to exceed inflation. These characteristics, coupled with the diversification benefits that real estate offers, make global REITs an attractive asset class in 2018.

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