Apart from blue chips and utilities stocks, Real Estate Investment Trusts (REITs) and business trusts listed on the Hong Kong Exchanges and Clearing Limited (HKEX) are also popular dividend-paying investment choices.
However, many investors confuse REITs with business trusts and have their eyes only on the dividend yields. In fact, these two types of trusts are completely different investment products. Let’s look at their regulatory requirements first.
REITs are governed by the Code on Real Estate Investment Trusts, which is not applicable to business trusts. A business trust can get listed as a stapled security that comprises two or more securities. For example, a company’s stock and trust units can be “stapled” for trading or transfer purpose. Similar to listed companies, listed business trusts have active business operations, and are subject to the same regulatory requirements. Specifically, REITs and business trusts differ in the following ways:
- Investment Scope
While a REIT invests at least 75% of its gross asset value primarily in real estate projects that generate recurrent rental income, there is no such requirement for business trusts. At present, business trusts listed in Hong Kong include those investing in the utilities and hospitality sectors. - Dividends
A REIT must distribute at least 90% of its audited annual net income after tax to its investors annually as dividend. Though this requirement does not apply to business trusts, certain business trusts may voluntarily distribute 100% of their distributable income to unitholders yearly. - Borrowing Limit
A REIT is subject to a maximum borrowing limit of 50% of its gross asset value, but a business trust does not have a borrowing limit.
Understanding the Code on Real Estate Investment Trusts is the first step to learn about REITs. The Code was recently amended to offer REITs greater flexibility in making investments. Interested parties may refer to the Consultation Conclusions on Proposed Amendments to the Code on Real Estate Investment Trusts.
