Real estate prices in Canada have been on a bull run for the last 20 years. Despite the economic troubles that have plagued the U.S. housing market, Canadian home prices are stable and continue to tick higher as demand increases and supply decreases.
Over the last four years, Canadian home prices have risen 25%, compared to the U.S. where home prices have declined by more than 27%. The boon in prices is also reflected in commercial properties. The value of buildings such as retail malls, grocery stores and big box store buildings has also been increasing on an annual basis. This is leading some of Canada’s largest retailers - such as Loblaw, and most recently Canadian Tire - to convert their many real estate holdings into real estate investment income trusts or REITS, in hopes of providing more option for investor and extra cash flow. REITS are attractive to both for a number of reasons.
What is a REIT?
A REIT is a security that sells like a stock on the major exchanges and primarily hold income producing real estate assets. When retailers turn their real estate into income trusts, they're referred to as “equity REITs", as the companies invest in their own properties.
The revenues from these properties comes principally from rents. When they first launched in the U.S in the 1960s REITs were considered a complicated investment, but are now seen as easily accessible, tax efficient and a good addition to anyone wanting to buy and hold an investment.
Other REIT benefits
REITs receive special tax considerations and typically offer investors high yields, as well as a highly liquid method of investing in real estate. Following the economic meltdown of 2008, investors are looking for safe income generating investments. REITs can provide this income security through the rents collected and the increase in property value. Unlike a company stock, REITs are less vulnerable to losing a dramatic amount of money in a short amount of time over negative news.
How tax laws differ for REITs
REITs enjoy favourable tax treatment, which became even more attractive in 2006, when the federal government sharpened their focus on tax income to ensure it wasn’t missing out on tax revenues. However, to continue to encourage real estate development and investment, the government excluded REITS from the new rules.The vast majority of income derived from a REIT must come from real estate itself to qualify for the tax-deferred status REITs enjoy. A REIT is not subject to Large Corporations Tax (LCT) and provincial capital taxes
Should you invest in REITs?
This information only applies if you hold your REIT outside a registered account, such as a TFSA, RRSP, or RESP.
If you’re thinking of investing in REITS there are some individual tax benefits as well. Remember: never make an investment decision without consulting a professional and doing the research to make sure it works for you.
REITs are seen as long-term investments. There are already a number of existing REITs, such as the aforementioned Canadian Tire, Loblaw, and Hudsons's Bay Company. As long as real estate property values continue to rise, the interest for retailers to turn their properties into real cash generators will exist creating some unique opportunities for Canadian investors.