As beginners learning how and where to invest money in Singapore, we tend to have a unique interest in Real Estate Investment Trust. These investment trust are attractive as they offer high dividend yield, relative to the local savings rate and are often associates of well known names in the local stock exchange. Examples of which will be Capitaland Commercial Trust, an associate of Capitaland and Mapletree Logistic Trust, an associate of Mapletree Investments.
While we understand what Real Estate is, not many know what investment trust are. Today we will be looking at what they are.
Investment trusts
An Investment trust is a listed, exchange traded closed-ended fund. They are consistently traded continuously throughout the day like a share. Similar to companies with listed stocks on the stock exchange, the investment trust have a business to operate. This business is usually managed by a team of experienced real estate personnel, and overseen by an independent board. When we buy into investment trusts, we acquire the rights to be a shareholder of the particular REIT. As the investment trust is owned collectively by all the shareholders, it will often try to maximise dividend yield in the interest of latter. Investment Trust can maximise dividend yield through two main ways; increasing rental income or selling properties in their portfolio for capital gains.
Difference between Investment Trust and ETF
When you a set your sights at the local Reits in Singapore, you will no doubt come across ETFs like the Lion Phillips S-Reit Exchange Traded Fund. Such ETFs are similar to a Reit in that they are traded on the stock exchange and issues a dividend to its unit holders. However, there are many other differences between an investment trust and an exchanged traded fund.
Firstly, investment trust are actively managed sources of funds whereas an ETF is a passive investment. This means that the underlying asset in an investment trust is being monitored and managed to produce the highest possible return. This is in comparison to an ETF where the underlying for the fund are the units of other Real Estate Investment Trust that it owns. While the manager of a REIT is capable of making decisions that can cause the stock price to go up or down, the manager of an ETF does not.
Difference between Investment Trust and a listed company
There are also notable differences between a REIT and a listed company. With the latter, the business and management team operates within one legal entity. This is not the case for a REIT where the management team belongs to a separate company from the trust itself. While the difference is subtle, it creates the need for a trustee in the usual relationship between management and unit holders. This is because there is a need to have a legal entity who hols the assets of the REIT on behalf of the unit holders. The trustee also ensures that the management is in compliance with applicable laws.
