Most of you have likely heard of real estate investment trusts, or REITs. But, do you know that there are also two other kinds of investment vehicles in Singapore’s stock market that are commonly mistaken for REITs? These are property trusts and stapled securities.
The two investment vehicles are similar to REITs in many ways – even seasoned investors occasionally use the three terms interchangeably. It is important to note though, that there are fundamental differences between REITs, property trusts, and stapled securities.
As investors, it is important that we are familiar with these differences so that we can make informed decisions. With that, here are the important differences between the three types of investment vehicles that you should be aware of.
The lowdown on REITs
REITs are collective property investment trusts that pool money to invest in properties. Investors can purchase units of a REIT through the stock exchange. But what makes a REIT different from a company that invests in properties? Well, for one, a REIT is bounded by more restrictions and regulations.
In Singapore, REITs must pay out at least 90% of their distributable income to unitholders each year. They are also limited to a maximum gearing ratio of 45%. The restrictions can hinder a REIT’s business, but they do come with some benefits. For instance, REITs enjoy favourable tax treatments compared to other types of companies.
The lowdown on property trusts
Like REITs, property trusts also pool money to invest in property. Investors can also buy units of these trusts on the stock exchange.
The key difference between a property trust and a REIT is that the former has no restrictions on the amount it must distribute to its unitholders. Property trusts are free to reinvest their money in any way they wish. They are also not subjected to leverage limits that are placed on REITs. Because of fewer restrictions, they do not receive the same tax benefits that REITs enjoy.
The lowdown on stapled securities
Stapled securities are listed property securities that are a bundled combination of either REITs, property investment companies, property trusts, or business trusts. This occurs when the investment vehicle wants to apply a REIT model to a portion of its property portfolio, but not to others. As such, only that part of the property portfolio will be bounded by REIT regulations and enjoy the associated tax benefits.
Likewise, stapled trusts are obligated to pay the required distributions to their unitholders only for the properties that are bound by the REIT structure.
The Foolish bottom line
REITs, property trusts, and stapled securities, though similar, are actually bound by different regulations and consequently have their pros and cons.
As investors, we cannot oversimplify the investment process by lumping all of them together. They have their own risk-reward profile and can offer investors different value propositions. Hopefully, this article helps clarify the differences between the three and allows you to make more informed investment decisions in the future.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.