Many investors always confuse about Real Estate Investment Trust (REIT) and Business Trust (BT). Although both of them have the name of trust but the nature of both trusts is quite different. Also because of the different of trust nature, both trusts behave differently to the market.
First, the objective for both trusts is very different. REIT is focus on passive investment vehicle which look for passive income while Business Trust actively engage in undertaking business operations. If you are an investor looking for passive income, you should invest in REIT rather than Business Trust.
Second, the regulation for dividend distribution is not the same for REIT and Business Trust. REIT is mandatory to distribute at least 90% of disposable income to the unit holders while Business Trust is not mandatory to distribute dividend. However, Business Trust can distribute dividend from operating cash flow. This means that even though the net profit of Business Trust is less than zero, Business Trust still can distribute dividend if the operating cash flow is positive. Because of this reason, Business Trust tends to own business that has high operating cash flow.
Third, gearing limit. REIT maximum gearing limit is only 35% for non-rated REIT and 60% for rated REIT. But for Business Trust, there is no gearing limit. Both has pro and con for this gearing limit. Gearing limit for REIT is good for investors who have low risk appetite while Business Trust can increase their leverage without limit is suitable for investors who have high risk appetite.
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Fourth, voting right. REIT requires at least 50% of voting right to pass through certain proposal while Business Trust requires at least 75% of voting right. This means that the controlling interest for Business Trust is only require to hold more than 25% of the company. Because of this reason, Business Trust tends to have higher free float and can raise more fund from issuing units to the public investors.
Fifth, Investment restriction. At least 90% of income for REIT must be generated from rental income while there is no restriction for Business Trust. This can be bad if the property market is in downturn, the income for REIT may be affected and thus lower dividend for the unit holders.
So, which one should invest? REIT or Business Trust? It is very depend on the investment objective of the investors. If you are looking for passive income, REIT may be a better choice. If you are looking for higher return, Business Trust tends to give higher return but come with higher volatility and high risk.
The full list of REIT listed in Singapore can be found here
The full list of Business Trust listed in Singapore can be found here
I’ve also shared these differences previously, you can watch the videos here: REITs vs Business Trusts
The comparisons between REIT and Business Trust are as below:
To learn more about REITs and how to best evaluate the different REITs available in the SGX, join us at the next REITs Investing Fundamentals Course.