REITs & Business Trusts

A Real Estate Investment Trust (REIT) is a trust that pools money from many investors and uses it to buy, own and manage a portfolio of INCOME-PRODUCING real estate — such as shopping malls, offices, industrial buildings, hotels or data centres. Investors hold UNITS in the trust rather than owning the buildings directly.

A listed REIT trades on a stock exchange like a share, so units can be bought and sold intraday at market prices. This gives an investor exposure to a diversified property portfolio with far less capital, and far more liquidity, than buying a physical building.

The structure separates roles: the TRUSTEE holds the assets on behalf of unitholders (a safeguarding role), while a REIT MANAGER makes investment and operating decisions (which properties to buy, sell, lease and finance). A property manager may handle day-to-day building management.

The main appeal is a relatively stable stream of income (from rents) plus the potential for the units' value to grow if the underlying properties appreciate.

A REIT collects rent from its tenants, deducts property expenses, manager fees, interest and other costs, and pays out most of the remaining net income to unitholders as DISTRIBUTIONS (the REIT equivalent of dividends).

The defining feature of the REIT model is a HIGH PAYOUT: REIT regimes typically grant favourable tax treatment on the condition that the REIT distributes a large majority of its taxable income to unitholders. In Singapore, a REIT must distribute a high proportion of its income to qualify for tax transparency — described here conceptually, without stating a specific percentage.

Because so much income is paid out rather than retained, REITs generally cannot fund growth from retained earnings alone. To expand, they raise new money — by issuing new units (equity) or by borrowing — rather than ploughing back profits.

Distributions are commonly quoted as DPU (distribution per unit) and the income yield as the distribution yield (annual DPU ÷ unit price). A higher unit price, all else equal, means a lower yield.