Different definition of Business Trust and Reit in Singapore
Those who are learning how to invest their money in Singapore will be very interested in the Real Estate Investment Trust Space. For many, buying into a good REIT with high dividend yield and strong consistent DPU growth means that they will get to enjoy the distribution of the REIT’s earnings every quarter. However, apart from REITS, investors can also invest in what is called a business trust. One good example of a business trust is Ascendas Hospitality Trust. However, what is the difference between a business trust and a reit.
Business trust were first created as a new business structure in 2004 and was intended to add depth and breath to the equity markets. This was 2 years after the introduction of Reits as an Asset class in Singapore.
Business Trust need not invest in Real Estate
One of the most important difference between a business trust and a Reit is that the former need not invest in Real Estate. As the mandate of a Business Trust is decided by the holders of the trust, they can effectively invest in any instrument that they decide on.
Business Trust need not abide by 45% Leverage Rule
By now, many of you will know that REITS are obligated to keep their Debt/Asset leverage to be within 45%. This is documented in the S-Reit legislations. However, that is not the case for a Business Trust, which can take on far higher leverage as long as it is within the permissible levels of the investment mandate set out by the trustholders.
Business Trust need not distribute at least 90% of income
Apart from the debt leverage rule, Reits also have to pay up to 90% of their distributable income. While some reits like Lendlease Global Commercial Reit will opt to distribute more than the 90%, the legislation acts as a minimum that the REITs need to comply with. In comparison, business trust do not face that obligation. This rule effectively dictates the business model that a REIT must have. As it has to distribute most of its distributable income, it means that most of its growth through acquisitions cannot be majority funded with internal sources of cash and they have to reply on debt or equity markets to raise the needed capital. A Business trust on the other hand, has the option of retaining its operational sources of cash and be less reliant on external source of funds.
In practice, Business Trust do often make it a point to follow the distribution principles that REITs do. This may have to do with the fact that they may want to appeal to the same capital owners who invest in REITs in the first place.
While we view business trust to be worthwhile investments, it is important to note that the more leniant regulatory environment and the more varied investment scope can subject investors to relatively higher risk. When seen in this light, it may make sense for investors to favor Reits over Business Trust if both are to offer similar levels of return.