Business Trusts and Real Estate Investment Trusts aka REITs – At first glance, both are trusts, both could potentially give us access to the cash flows from the underlying properties which most retail investors may not have the capital to access and a few other similarities. However, they are also vastly different.
Do you know the difference between the two?
Today we would show you some key factors that differentiate between these two popular listing structures in Singapore.
From the above article published by The Business Times Weekend in 2011, there is quite a comprehensive showing on the differences between Business Trusts and REITs. If you are interested, they have even gone a step further to show their comparisons with the conventional listed companies. The categories included their structures, corporate governance, gearing limit and finally dividend.
However today, we would only focus on what we think are the top 3 differentiating factors between these 2 vehicles.
2) Dividend distribution
Let’s go straight into the highlight – the issue of dividends:
Business Trust: No requirement to distribute
REIT: MUST distribute ≥ 90% of income to enjoy tax benefits under the Income Tax Act
2) Different Objectives
Business Trust: Focused on business operations as well as expanding operations
REIT: Primarily passive investment vehicles focusing on passive income
3) Gearing aka Leverage
As mentioned in a recent article by Today Online titled, “MAS proposals to tighten S-REITS rules are credit positive: Moody’s” dated Oct-2014, in the case of gearing aka leverage, we refer to it as Borrowings as a % of their Assets or simply Borrowings/Total Assets.
Basically, the lower this ratio is, the lesser leveraged (Borrow lesser $) the entity is – leading to a more conservative capital structure.
Business Trust: No limit – this would clearly help in their objective to expand their business operations
REIT: 35% for non-rated REITs and 60% for rated REIT.
Business Trust: The newly listed Accordia Golf Trust (SGX:ADQU) as explored by Willie here and CitySpring Infrastructure Trusts (SGX:A7RU) count among some of the many publicly listed business trusts on the Singapore Exchange.
CitySpring Infrastructure has recently been in the spotlight following their planned merger with Keppel Infrastructure Trust (SGX:LH4U) to form the single largest infrastructure-focused business trust in Singapore with total assets of over S$4 billion. In terms of market capitalization, this could place them to be in the running for inclusion among the STI!
This blockbuster acquisition clearly showed the business expansion objective of business trusts
Value In Action
At the end of the day, both these vehicles have different investment objectives at their heart. It boils down to the individual investors – or simply put, your personal investment objective.
In general, if one is looking towards passive income, REITs may be a better option. However if one is looking more towards capital gains, a Business Trust type of vehicle might better fit your investment objectives!
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All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong does not own any shares in the companies mentioned above.