Carving out REITs from the Income Trust Sector

Response by the REIT sector to a decision by the Federal Government to consider changes to the structure of investment trusts was discussed at the RealREIT conference in Toronto this week. 

The discussion was fueled by a 5.4% drop to 122.17 in the S&P/TSX REIT index (RTRE-I) on September 26th following the Governments announcement. The index has since made a significant recovery trading above 130 on Thursday afternooon.

According to Michael Brooks, Executive Director of the Real Property Association (RealPAC),  “the Governments initiative isn’t intended to target REITs and the Oil and Gas sector.  It was to target business trusts and the threat of big companies converting to trusts.” Other participants at the conference noted that the Government had not isolated REITs from other income trusts. Catherine Marshall, Senior Vice President, LaSalle Investment, said “The Government white paper included REITs along with other types of income trusts”.

With a market cap of $21-billion, the REIT sector makes up only 13% of the income trust market. From a total of 227 income trusts trading on the TSX, about 25 are REITs.  RioCan and H&R are the only REITs in the top 20 income trusts by market capitalization.

Unlike other income trusts, REITs were established under specific legislation passed in 1994.  REITs offer a form of ‘passive income’ where the under lying value of the real estate provides security for the investment. Ira Gluskin, President of Gluskin Sheff and Associates said that the “stability of real estate will triumph over other income trusts”.

REITs are an international phenomena with established and growing REIT markets in the U.S., Australia, Asia and Europe.  While REITs are evident in other countries, Canadian income trust legislation is unique to Canada.

According to  Michael Smith, Vice President and Real Estate Analyst with National Bank Financial, “Globalization of REITs will result in the separation of REITs as a separate sector” in what he referred to as ‘a carving out of REITs’.  Because Canadian pension funds own about $80-billion dollars in real estate that would otherwise be considered ideal in a REIT structure, there is a ‘shortage of REITs in Canada’.  His advice to the Federal Government was to ‘leave the REIT sector alone’.

Michael Brooks, Executive Director of RealPAC expects “the Federal Government will act to make income trusts less attractive by lowering dividend tax.”  The effect of lowering dividend tax will be to improve returns in other types of corporations.

Bill Kennedy, President and COO, Morguard REIT indicated that RealPAC will be ‘making noise’ on behalf of the REIT sector with the goal of differentiating REITs from other types of income trusts. The Government has provided a December 31, 2005 deadline for comment.

Catherine Marshall, Senior Vice President, LaSalle Investment indicated she thought,  “The average investor is not differentiating between income trusts and REITs.”  At this time RealPAC has no plan to address the average investors view of REITs.


Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

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Ann launched RENX in 2001 as a part-time venture and has grown the publication to become a primary source of online news for the Canadian real estate industry. Prior to…

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