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Handout photo of an apartment building in Toronto that belongs Centurion REIT.

Handout/Centurion Apartment REIT

Investors who stuck with real estate investment trusts through the roller coaster ride this summer are finally being rewarded for their patience.

After nearly going apoplectic when the S&P/TSX Capped REIT index shed 19 per cent from late April to early September, they're finally recovering some of their losses, with the index now up 6 per cent from its low.

Much of the rebound boils down to the bond markets. REIT prices tumbled this summer after the Federal Reserve hinted that it was ready to start scaling back its massive monthly Treasury purchases, sending bond yields soarting. The U.S. 10-year yield climbed over one full percentage point – an astronomical amount in the bond world – and the rise rippled into other bond markets, especially Canada's. REIT prices are often valued relative to 10-year bond yields, so when their yields popped, REITs plunged.

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Now the opposite is playing out. From its peak yield of 2.82 per cent in early September, the 10-year Government of Canada yield is down to 2.55 per cent, and REIT prices have reversed course. But you have to wonder whether these yo-yo price moves are going to persist for as long as bond yields bounce around. The correlation between the 10-year bond yield and the Capped REIT Index from April 1 until now is a stunning negative 0.96, meaning the two have moved in almost the exact opposite direction throughout the turbulence.

Now let's be clear: REITs still have good fundamental value. As of last earnings season, their tenants paid their rents with no problems. The next reporting season starts in a few weeks and right now there aren't any dire warning signs.

There's also a resurgence of investor interest in income-oriented investments. Although Canadians' appetite for bonds remained timid as of the end of September, they put more money into balanced funds than they took out last month, according to the Investment Funds Institute of Canada. Also, three of the four highest net inflows in the U.S. went into bond and credit funds in September, according to Morningstar.

Those rank highly among the reasons you're starting to hear arguments in favour of buying REITs again. At these levels, the top tier trusts can look like steal, especially if you take a peek at their capitalization rates, a key driver of property values. Cap rates for 'class A' properties barely moved throughout the summer, according to analyst Michael Smith at Macquarie Securities, meaning the underlying value of their properties didn't fluctuate much. (The same can't be said for 'class B' and 'class C' assets, though they have started to come back.)

But remember that in these crazy markets, fundamentals often don't mean much. REITs are more or less trading as proxies for bonds, and given the strong correlation between the two securities, you have to wonder: is there much reason to get giddy about REITs if the taper has to happen at some point, and timing it is nearly impossible? There's a case to be made that a short-term investment might pay out, but the long-term outlook is certainly unclear.

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