Subject: Re: Generational lows (UK REITs).
You're correct, that type of comparison vs gilt prices is a normal way to estimate the valuation of the REIT sector as a whole.

Yes, very common, but my observation is that it's "normal" only among fools, or those with perverse employment incentives. You can look at a company that is trying to paint itself like a bond as if it were a bond, and clearly a lot of people (way too many) do so, but it isn't: it's a company. The ultimate long run return will be a function of the prospects of the underlying business, period. Even more so than with typical non-REIT businesses, as the capital allocation choices and expansion capex are circumscribed so the results then become even more relatively reliant on the underlying results of the existing line(s) of business.

I remember well when the fashion of conversion to REIT or REIT-like (income trust) structures became very popular in some places. A good example was Yellow Pages, which looked like the ideal perpetual cash cow until of course its business disappeared with the advent of internet search. Investors in the Canadian one were wiped out after thinking they were buying a perpetual bond. They learned the hard way that a company that looks like a bond is still a company.

In a more sane world, given that the long run financial return is entirely a function of the performance of the underlying business, the market price should be a function of the prospects of the underlying business, and that's how any rational person should evaluate the firm. The yield comparison trope is a misleading trap if you look closely. Many people do it, so prices swing when they shouldn't rationally, but value and price are rarely the same thing, and value tells in the end.

Arguably the most important thing in investing that few people know is that changes in prevailing interest rates do not change the value of stocks, merely their prices. And even then, only for a while. Stocks bought at high valuation multiples when interest rates are low do badly, and stocks bought at low multiples when interest rates are high do well. It's the valuation based on future earning power that matters, not the prevailing interest rate environment on the date of purchase. (a comment obviously not wholly applicable to firms whose business itself relies on a given interest rate environment because of their own interest income and expense profile)

Nothing about this is to suggest that income trusts and REITs are bad or useless or not currently a good investment, nor that they have poor underlying businesses. Just that they aren't bonds, and therefore should not be valued as such.

The complicating factor with real estate specifically is that maybe some people think that the firms will themselves have to be borrowing at higher average rates in the next 20 years as a result of recent rate moves. They would be concluding that current interest rate moves truly affect the value of the underlying business, not just the stock prices due to yield competition--fair enough. But that is rational only to the very very weak extent that the rate trajectory inference is valid. Current rates rarely last, and current rate changes rarely have anything much to say about the future average real rates. As a result, in reality the price moves are almost all based on the pointless yield competition theory and ignoring the future business value aspect.

Jim