Real estate investment trusts are now something of a lonely — but more attractive — group following the recent decision by the federal government to change the manner in which income trusts are taxed in 2011.

REITs have largely been exempt from the slew of changes that will affect income and resources royalty trusts. In fact, at a time when other types of income trusts are contemplating uncertain futures, a number of REITs have been raising capital. For instance:

> Toronto-based Allied Properties REIT raised $41 million via the sale of two million units priced at $20.50 a unit. The proceeds have helped finance the purchase of a $55-million property portfolio in Montreal, Winnipeg and Toronto;

> Toronto-based Dundee REIT raised $150 million from the sale of 4.1 million units priced at $36.50 a unit. Dundee will use the cash for general purposes, including funding strategic acquisitions and repaying debt incurred in connection with those acquisitions.

> Toronto-based Calloway REIT raised $225 million from the sale of 7.7 million units. Calloway plans to use the proceeds to help finance the $442-million purchase of interests in 16 SmartCentres, which consist of shopping centres and development properties.

> Winnipeg-based Lanesborough REIT and Toronto-based White-rock REIT raised $20 million and $25 million, respectively. Lanesborough operates mostly in Western Canada, while Whiterock operates across Canada.

> Toronto-based Chartwell Seniors Housing REIT raised $175 million from the public and $100 million privately from an offering of units and convertible debentures. However, because the issue got caught up in the federal government’s announcement, the terms weren’t as good as originally anticipated.

Some analysts suggest that, in general, REITs represent an attractive investment category, despite the weakness in the overall income trust sector.

In part, this is because of today’s relatively low interest rates and the prospect of even lower rates in the near term, says Frank Mayer, a real estate analyst at Desjardins Sécurité Financier in Toronto.

“The underlying fundamentals continue to be lower interest rates,” says Mayer, who says his firm expects that interest rates will decline over the next 12 to 24 months. “[Low interest rates] are generally good for income-producing properties, including office buildings, apartments and industrial buildings. And they are also good for housing. We have a positive outlook for real estate.”

Neil Downey, a real estate analyst with Toronto-based RBC Capital Markets, concurs that interest rates are the real driver behind the outlook for properties. Low rates are “a significant influence,” he says.

Mayer points to the “strong demand” for properties in Canada and the U.S. from institutional and pension fund clients, reflected in the healthy mergers and acquisition market.

In Canada, a consortium including the CPP Investment Board recently acquired O&Y REIT of Toronto for about $2 billion. Summit REIT of Toronto was acquired by ING Real Estate Canada Trust for about $3.3 billion, at an 18% premium to the trading price at the time and about 10% above what most analysts thought the units were worth. Two Quebec-based REITs — Cominar REIT of Quebec City and Montreal-based Alexis Nihon REIT — have agreed to merge.

As well, there has been substantial M&A activity among REITs in the U.S.

“This suggests that there is a significant number of buyers of real estate. There is a worldwide search for high-yield sectors,” says Mayer, who expects the pace of M&As to remain high. Returns from investing in REITs — which are in the 6% range — are higher than the 4% return gained by investing in 10-year Canada bonds.

Aside from the boost to the REIT sector that acquisitions will generate, Downey likes the investment prospects of the property portfolios held by a number of REITs. In particular, he is “pretty positive” on Dundee REIT: “Seventy-five per cent of the income from the portfolio is from office assets. The office property sector is at a pretty decent point in the recovery sector.” Downey has a $38.25-a-share target on Dundee — barely above the current price. “But it amounts to a 8% return,” he says.

Downey recently upgraded a number of other REITs, including Alexis Nihon (which he now rates as an “outperform” with a new $14.75-a-share target); Morguard REIT of Mississauga, Ont. (with a new target of $13.50 a share, up $1 a share from the previous estimate); Calloway (which now has an “outperform” rating with a $30 target); and IPC U.S. REIT, a Toronto-based REIT that owns and leases office and retail space in the U.S. (now given as an “outperform” rating with a US$11-a-share target.)

@page_break@Mayer notes that strong economic growth in Alberta, in particular, is a leading factor in the growth of returns from property: “Economic growth in Alberta is above the rest of the country.”

Calgary-based Boardwalk REIT has been able to increase its operating rents this year by an unprecedented 40%. Boardwalk, which claims to be the country’s largest owner/operator of multifamily rental communities, has seen its market capitalization almost double over the past 12 months. Its portfolio of 34,000 units is concentrated in Alberta, British Columbia, Saskatchewan, Ontario and Quebec.

The health of the Alberta real estate market sector also boosts non-REIT real estate companies. For instance, Calgary-based Mainstreet Equity Corp. has also done well “because it is subject to the same fundamentals,” says Mayer.

Brad Cutsey, a real estate and hospitality analyst with Blackmont Capital Inc. , is a supporter of Mainstreet. He recently increased his 12-month target on the issuer to $16.75 a share — up from $13.70.

Mayer expects that REITs based on commercial real estate should generate returns for the next 12 months of at least 10%, about half the gain expected for more conventionally structured firms active in the real estate sector. IE