REITs, trusts and stapled securities

What is the difference between a REIT and a business trust? What about REITs and stapled securities?

Real Estate Investment Trusts (REITs), business trusts and stapled securities are three different vehicles that a security investor can utilise to gain exposure to the real estate sector.

In this article we will present to you the key differences between these 3 types of securitised real estate investments.

REITs

In most jurisdictions, in order for a collective property investment to call itself a REIT it must pay out a minimum of 90% of its rental income to unit holders annually.

This comes on the back of requirements of minimum assets sizes and restrictions on business activities.

REITs are also subjected to limits on the amount of loans that they can take. In Singapore, the gearing limit is 45%.

With these conditions fulfilled, the REIT enjoys tax transparency by the authorities, while individuals who hold the REITs also enjoy tax-exemption treatment.

Trusts

Business trusts are also collective property investments that pool money from investors primarily to invest in income-producing real estate.

Rental income is similarly distributed to unit holders after deducting costs such as management fees and other overhead.

Like REITs, trusts are also by collective investment codes and other regulations that may be imposed by the bourses in which they are listed.

However, and herein the most important difference between REITs and trusts, is that trusts are not obligated to pay out a minimum amount of its rental income to unit holders.

Trusts are also not subjected to the leverage and asset size limits that REITs are imposed with, but will not enjoy the tax transparencies associated with REITs.

Stapled securities

In the context of securitised property investments, stapled securities are listed property investment securities that can be a bundle combination of either REITs, trust units or even property stocks.

This commonly happens when a securitised property investment vehicle decides to apply a REIT model to a certain segment of its property portfolio while taking on a trust model for another segment to form a single trade-able unit known as the stapled security.

In this manner, the manager of the stapled security need to be bound by REIT regulations only for the segment of the portfolio that adopts the REIT model.

Hence a stapled security is obligated to pay a the minimum amount of rental to unit holders only for the properties that are adhering to a REIT structure.

Stapled securities are similarly bound by listing and reporting regulations that may be imposed the the respective bourses.

This entry is part of REITsWeek's glossary of REITs and real estate investment terms.