REIT vs Business Trust, 5 Differences You Must Know

Singapore Skyline Erwin Soo

22 Oct REIT vs Business Trust, 5 Differences You Must Know

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.

Trust Objective

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.

Dividend

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.

Gearing Limit

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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Voting Right

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.

Investment Restriction

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

The comparisons between REIT and Business Trust are as below:

REITS vs Business Trust 2016 Update

To learn more about REITs and how to best evaluate the different REITs available in the SGX, join us at the next REITs Investing Mastery Course.



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4 Comments
  • ryan
    Posted at 12:28h, 23 October Reply

    Interesting. Thanks.

    Given that Business Trust has less covenants, what then is the difference between owning a business trust and owning a company?

    • Louis Koay
      Posted at 11:41h, 24 October Reply

      Hi Ryan

      The main difference between Business Trust and public company is Business Trust can distribute dividend from operating cash flow but for a public company, the company must has positive net profit to distribute dividend.

      Other than that, company requries simple majority(more than 50%) while business trust requires supermajority(more than 75%) to for board approval.

  • 2013 BigFatPurse - Year in Review
    Posted at 11:30h, 01 January Reply

    […] REIT vs Business Trust, 5 Differences You Must Know […]

  • jimmy chan
    Posted at 10:46h, 07 May Reply

    since business trust(bt) can continue to pay div. based on positive cashflow even if profit is less than zero, what happens when the assets that generate the revenue become old/obsolete n needs major repairs/upgrade/replacement? how will this affect unit holders?

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