Public vs. Private

What's the Difference?

There are two kinds of REITs - public and private. Units in public REITs are traded on the stock exchanges and their values fluctuate constantly, just like regular stocks. When investors buy publicly traded units, they pay the current market price (not necessarily based on the actual value of the properties).

Real estate on its own is distinct from other investments or commodities in that it is insulated from the fluctuations of the public markets. Of course, private investments aren't as liquid as stocks, but it's the liquidity a public REIT that brings volatility to an otherwise stable investment.

Witness the sell-off that took place when the public markets reacted to the federal Finance Minister's announcement,in October of 2006 of the changes to the tax rules for Canadian Income Trusts (which invest in businesses, not real estate). The result, though temporary, was that investors became confused and reacted fearfully, selling their shares and decimating the unit prices of the completely unrelated public REITs.

In contrast, units in a private REIT do not have an active secondary market. As such, a private REIT's unit price is not correlated to the equity markets, and therefore immune to their volatility.

With private REITs, a unit's price is based on the most recent appraised values of the properties - so the price you pay is not affected by other investors entering or leaving the market. For investors in private REITs, this can translate to greater cash distributions because a greater proportion of each investment dollar goes towards the purchase of income-producing real estate, rather than being diluted by the costs and fees associated with stock market listing and trading.

As a distinct asset class, real estate has limited correlation to most stocks and bonds. Investors who fled other sectors to buy units in public REITs still had to contend with market whims that sometimes had little to do with actual real-estate conditions.

Owning units in a private REIT removes that risk. It's like investing in a piece of property rather than a stock, so the "herd instinct" associated with a public listing is substantially lessened. These traits allow investments in private REITs to contribute to effective income generation and wealth creation for families and institutional investors alike.

Tax Advantages For The Investor

One of the greatest advantages of any REIT—whether public or private—is its tax- efficiency. Unlike stock-issuing corporations, where tax is paid on net income prior to distribution of dividends—which are taxed again in the hands of the investor—REITs pay no tax whatsoever because all of the net income is distributed. This amounts to more being received by unitholders. Of course, the income is eventually taxed in the hands of the unitholder, but (fortunately) it’s not just the profits that flow through to investors, the REIT’s special tax treatment does too.

Regardless of the size of your investment, your marginal tax rate, your country of origin, or whether you pay tax as an employee or business owner, as a unitholder you enjoy favoured tax treatment on the distributions you receive from a REIT. As far as the Canada Revenue Agency is concerned, it’s just as if you owned the property solely. (The government calls trusts “flow-through entities” for that reason.) This means that individual unitholders are entitled to the same “flow-through” income benefits and tax deductions that direct owners of real estate enjoy—but without the drawbacks, such as liability for debt and litigation, and responsibility for day-to-day management of the properties.

Thus, if you are a unitholder of a private REIT, significantly more cash will flow through to you at each disbursement, and less will be taxed in your hands.