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Not much has changed for Canadian real estate investment trusts as they reported strong results over the past week – occupancy rates are still high, lease terms are growing increasingly attractive and tenants are lining up to get into some of the country's biggest shopping malls.

But if you were to judge the sector solely on its yields, you would be forgiven for thinking that something very bad was in store for the sector. At 7 per cent at the open of markets Tuesday, real estate investment trusts were trading at their biggest premium to Canadian government bonds since the financial crisis took hold in 2008.

Higher yield usually means higher risk. With the 10-year Canada bond at 2.5 per cent, the spread is 4.5 per cent.

"Outside of the credit crisis and the recovery period, the spread hasn't been this high since 2003," said CIBC World Markets analyst Alex Avery.

But that doesn't mean that Mr. Avery is sour on the sector. He said that for worried investors, REITs are "an ideal middle ground between getting out of the market entirely and doing nothing.

"By rotating into REITs, you can remain fully invested, mitigating the risk of entirely missing a rebound, but also reduce exposure to further downside," he said.

He said these companies need three things to succeed: easy-to-get financing at low rates, strong fundamentals in property markets and limited new supply.

"We know REITs weathered the credit crisis with virtually no damage, so they're well positioned to deal with whatever this is," he said. "Fundamentally, REITs and real estate require those three things to thrive, and all three are present today. Banks and most institutions are overcapitalized, looking for safe places to lend money, while falling benchmark yields reduce the cost of debt."

According to a new report by commercial real estate company Avison Young, Canada's office vacancy rate reached 7.8 per cent at the midpoint of 2011, down from 9.9 per cent at mid-year 2010. Office towers are key holdings for many of the country's REITs.

"The recovery in the marketplace is particularly evident across Canada's downtown business districts, which traditionally act as a bellwether for the overall health of the market," said Bill Argeropoulos, director of Canadian research at the brokerage firm.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 0:10pm EDT.

SymbolName% changeLast
CM-N
Canadian Imperial Bank of Commerce
+1.04%50.59
CM-T
Canadian Imperial Bank of Commerce
+0.91%68.52

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