Business Trusts vs. REITs: Key Differences in Singapore

Singapore is an international financial hub that offers various investment structures for individual and corporate investors. Two of the more popular ones include Business Trusts and Real Estate Investment Trusts (REITs). While both are an avenue of investment, understanding Business Trust vs REIT is essential as they have different characteristics and serve different purposes. To make an informed investment decision, it is crucial to grasp the dissimilarities between Business Trust vs REIT in the Singaporean framework. Recognizing the contrasts between Business Trust vs REIT helps investors align their choices with their specific financial objectives and risk tolerance, ultimately guiding them toward the right investment path in Singapore.

Business Trust vs REIT: An Overview

Comparing Business Trusts and REITs

Though business trusts and REITs are both collective investment schemes, understanding the key differences in Business Trust vs REIT is crucial as they have distinct objectives and serve various purposes. The comparison of Business Trust vs REIT highlights how business trusts focus on active management of business operations, while REITs are designed primarily for generating income from real estate investments:

• Business Trusts: A business trust is an investment vehicle that actively manages the business operations. This can include a wide variety of assets, such as infrastructure, utilities, shipping, and others. Unlike most of the traditional trusts, which involve passive investments that are actively managed, business trusts are actively involved in the day-to-day running of their underlying assets. Returns for investors are, therefore, directly linked to the performance of the underlying business operations.
• REITs: A real estate investment trust is a special trust that primarily invests in income-generating real estate assets. This includes commercial buildings, shopping malls, residential, and hotel properties. REITs are specially designed to provide a steady stream of income for investors, mainly from the rental income and capital gains. REITs in Singapore are required by law to distribute at least 90% of their taxable income to unitholders, thus very suitable for income investors.

Key Differences Between Business Trusts and REITs

Business Trusts vs. REITs: Core Differences

When comparing Business Trusts vs REITs in Singapore, several key differences stand out:

1. Asset Type:

• Business Trusts can hold a vast variety of assets, including infrastructure, utilities, and operational businesses.
• REITs focus only on real estate assets, although they may have the income-generating property of renting out those real estate properties.

2. Income Distribution:

• Business Trusts have no statutory obligation to distribute their income to the unitholders. The distribution policy is made at the discretion of the trustee-manager.
• REITs are required by statute to pay a minimum of 90% of their taxable income, thus providing investment in a source of income that is relatively predetermined.

3. Regulatory Oversight:

• Business Trusts are regulated by the Business Trusts Act that enables them to operate active business. Having control operationally is very important for the trustee-manager, but in this, there is an operational risk also involved.
• REITs are regulated under the Securities and Futures Act and the Code on Collective Investment Schemes, which, therefore, provides for tighter regulation, in particular concerning the limits on income distribution and leverage limits.

4. Leverage:

• Business Trusts also afford greater leverage flexibility and no regulatory controls are imposed on the business to maintain a certain gearing level.
• The maximum level of leverage is nevertheless subject to the REIT legislation to restrict a REIT in over-gearing, thereby placing in jeopardy the investor's interest. A Singapore-based REIT is generally being allowed to incur up to 50 percent of the asset value as debt.

5. Taxation:

• Business Trusts are likely to be subjected to corporate tax if in the opinion of the tax authorities, its operation resembles that of a corporation.
• Unlike REITs in the other developed countries like the US and UK, Singapore REITs are not subjected to direct taxation at the trust level, which allows pass-through income to be passed on to unitholders, with tax by way of deferral.

How to Set Up a REIT in Singapore?

Establishing a REIT in Singapore: Step-by-Step

Setting up a REIT in Singapore involves a chronological procedure with careful planning and compliance requirement adherence. The general process is as follows:

1. Formation of trust: The first step of forming a trust under Singapore law; this will involve the drafting of a trust deed that will outline the terms and conditions under which the REIT will operate.
2. Appointment of a trustee: A qualified registered trustee must be appointed to undertake the REIT's activities. The trustee holds the REIT's assets on behalf of the unitholders and ensures that it abides by the stipulated regulatory requirements.
3. Identify and Acquire Assets: A diversified portfolio of real estate assets that generate incomes should be acquired. The said assets have to be evaluated with respect to their potential for generating stable rental income and capital appreciation.
4. Regulatory Approval: Before listing, a REIT must get approval from the Monetary Authority of Singapore. This involves filing a prospectus outlining details of a REIT's assets, management, and financial projections.
5. Listing on SGX: Once approved by MAS, the REIT is listed on the Singapore Exchange. This will help a REIT in raising capital from public investors by way of an offer of units in trust.
6. Ongoing Compliance: Post-listing, a REIT has to comply with ongoing regulatory requirements, which include regular financial reporting, maintaining leverage limits, and distributing at least 90% of its taxable income to unitholders.

Conclusion

Knowing the difference between Business Trust vs REIT in Singapore becomes important in making an investment decision. While they are both unique in their benefits, they also take care of varied needs with respect to the investment objectives. On one hand, the flexibility in managing different kinds of assets is taken care of by business trusts; on the other hand, REITs are effective ways of generating income with stability from investments in real estate. Understanding Business Trust vs REIT helps investors align their choices with their financial goals, and entities like One Pacific Trust offer expertise in navigating these options. If you are looking to establish a REIT in Singapore, for it to be successful, it will mean adhering to the regulatory guidelines and compliance with the steps outlined below. Comparing Business Trust vs REIT ensures that investors make well-informed decisions that best suit their investment strategies.