What are the differences between a REIT and a Business Trust?

Hi, just to give a rather layman opinion of the differences of the two. Essentially, Real Estate Investment Trusts (REITs) and Business Trusts differ in a few distinct ways, most importantly these few below.

1) type of assets they are able to hold

REITs themselves are, as the name suggests, only able to contain assets in the property market. For example, Capitaland Mall Trusts lists of assets include multiple retail shopping malls such as Tampines Mall, JCube and Plaza Singapura eg., and these income generating properties are what provide the cash flow and thus dividends to investors of the Trust.

However, Business Trusts are not restricted to only being able to hold onto property assets, they can basically be any type of Business such as Ships Leasing (First Ship Lease Trust) and Network Connectivity (NetLink NBN Trusts). Hence, this allows for a form of flexibility as Business Trust allow for the Trust structure to operate outside of just the real estate market. More examples of Business trusts can be found here -- http://www.mas.gov.sg/regulations-and-financial...

2) Management Structure

Within these Trusts, there will be a Trustee (someone who holds onto the assets in name for the benefit of another) and a Manager (who runs the operations). Business Trust combines these 2 roles into 1, hence a Trustee-Manager runs these operations, while holding onto the assets, whilst for REITs, they seperate these 2 roles into seperate entities. As a result, governance within the Business Trust and a REIT will have differences, where REITs require a smaller proportion of independent directors within it's board of directors and requirement for votes to pass. Such governance differences may mean nothing much to a small retail investor, who may be more fixated on just the performance of the REIT/Business Trust, but for larger stakeholders who wish to make drastic changes within, it may mean alot!

3) Dividend/Capital Gain Distribution Requirements

REITs have rather stringent requirements, where 90% of their taxable income has to be distributed as dividends within the year. This affords REITs very attractive tax exemption incentives. Hence, you can almost be sure that REITs will be able to provide a substantial dividend payout. according to Yahoo finance, REITS such as Ascendas Real Estate Investment Trust has a 5 year average of 6.43% (https://sg.finance.yahoo.com/quote/A17U.SI/key-...) , which are substantially higher than say, a bank's dividend, such as DBS's (3.40%).

However, Business Trusts do not have such requirements, and hence do not have obligation to payout dividends if dividends are not declared. You could have no payouts this year, and next year payouts could be 10%!

TLDR: In essence, REITS are somewhat a "subset" per say of Business Trusts, but with different governance structures, greater stringent requirements for tax exemption incentives that leads to their high, consistent divident payout, whereas Business Trust do not require, nor are obliged, to do so. Business Trusts are Trusts structures that also can hold multiple asset classes outside of real estate, while REITs only can have Real Estate assets.

Hope this helps you to understand better. If there are any errors in my explanation, feel free to correct me or add on!

Great question! It's easy to get confused with a REIT and a Business Trust as both are listed on the SGX as "trusts". Despite both a REIT and a Business Trust owning the same type of asset, there are multiple differences. The main difference between the two is that a REIT is involved in real etate whereas a Business Trust is not restricted to real estate and can operate in any field. Some other differences include management structure, gearing limit and dividend distribution.

In terms of management structure, a REIT involves two separate entities (manager who runs operation, and trustee who owns the asset) while a business trust is managed by the same entity that owns the assets and manages them. The management structure comes into importance when unitholders request for a change in management. In a REIT, unitholders can remove the manager of the REIT with more than 50% of "yes" vote however, a business trust require a 75% "yes" vote.

The gearing ratio for REIT is limited to 35% but a business trust does not have a borrowing limit. This ratio is an indicator of the level of leverage of the REIT or business trust hence, business trusts may be riskier as there is no hard limits on how much they can borrow.

Lastly, REITs and business trusts differ in the policies regarding the level of dividends. REITs are required to distribute at least 90% of their taxable income through dividends annually. This ensures a regular stream of income for REITs investors. Conversely, business trusts do not have to adhere to a minimum level of payout.

A possible follow-up question would be "which of the two should I invest in?"

The first step to choosing between a REIT and a business trust would be to determine your investment objectives. For a passive income, investing in REITs would be appropriate. Whereas if you're looking to be engaged in the business operations,

a business trust could potentially provide defensive returns through regular income distributions and high payout ratios. ​​​