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These Property Companies Can Actually Be REITs

Real Estate Investment Trusts (REIT), whose main job is to own and help manage a basket of properties for their unit-holders, have been a great invention for both property owners and retail investors.

REITs are avenues for property owners to unlock the value of their properties. Cash is thus freed up for the property owners and they can then reinvest in other projects.

At the same time, REITs give retail investors an opportunity to own a slice of huge properties which are in all likelihood impossible for them to own individually (as an example, you can own a piece of the multi-billion dollar Marina Bay Financial Centre through a REIT).

Despite the benefits that REITs can bring to property owners, there are still companies with a sizeable portfolio of investment properties that prefer to not spin-off their real estate into a REIT.

In Singapore’s stock market, there are two such companies, namely Hongkong Land Holdings Limited (SGX: H78) and UOL Group Limited (SGX: U14). In fact, when you compare a list of different REITs for investments, it may even make sense to include these two firms too.

Although both companies are also involved in the property development business, the majority of their assets and earnings actually come from recurring sources like the rent they collect on their investment properties and the provision of hotel management services.

With Hongkong Land, its investment properties make up more than four-fifths its total asset base. Meanwhile, those properties had contributed more than 70% of Hongkong Land’s operating profit in 2013.

For UOL group, some 56% of its operating profit in 2014 originate from its property investment, hotel operations, and management services. Also, more than 70% of the company’s asset base belong to these segments.

Foolish Summary

Given what I’ve shared, it can be observed that both Hongkong Land and UOL Group have business models that are very similar to those of a REIT  (recurring revenue stemming from the ownership of various types of real estate).

Unlike a REIT, which is required to distribute at least 90% of its profits as dividends, Hongkong Land and UOL Group are not bounded by such a rule. Thus, both companies actually have a much lower dividend yield compared to a REIT.

While shareholders of both companies may lose out in terms of yield, the advantage is that both firms can then reinvest their profits for future growth. This is in contrast to REITs, which typically have to raise money through taking on debt, private placements, or rights issues in order to fund their expansion plans.

For more investing analyses and important updates about the stock market, sign up to The Motley Fool Singapore's free weekly investing newsletter, Take Stock Singapore. Written by David Kuo, it can help you grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Stanley Lim doesn't own shares in any company mentioned.