by Ong Qiuying and Choo Hao Xiang 31/05/13 7:00 pm
The hunt for yield has spurred a bull market in Singapore-listed trusts. While trusts have generally been perceived to be stable yield plays, share price performances of business trusts had not able to keep pace with that of its other akin investment vehicle – real estate investment trust. Are investors of such trust in danger of being left behind?
Roughly one decade into the introduction of the first trust, numerous trusts have found their way onto the Singapore Exchange. Looking at the past 12 months, trusts made up a quarter of 23 new listings on the local bourse.
The intriguing fact about these new trust listings is that majority is in the form of a business trust structure. Despite the lacklustre performance of business trusts since listing, investors’ enthusiasm has not faded as seen in the recent public tranche offered by Croesus Retail Trust that was 48.8 times subscribed.
Are All Trusts The Same?
Established for the purpose of acquiring properties, business trusts and real estate investment trusts (REITs) are essentially cash-generating assets. The vehicle, which is created by trust deed, provides investors the chance to own a portion of the trust’s assets, be it infrastructure assets or retail malls, which would otherwise be inaccessible to retail investors.
The reason behind such a setup instead of a company lies in the capital intensive nature of the business and the expertise required to manage the assets. It also allows companies which pump assets into the trust to realise their investments and obtain recurring income such as management fees concurrently.
Another similar feature is the investment return. Apart from capital appreciation, returns from such investments would typically be accompanied by regular distributions. Unlike a company, these distributions are derived from cash flows rather than accounting profits.
Despite the similarities, business trusts are structurally different from REITs, which can be seen in the table below. Because of these differences, REITs and business trusts can have very different levels of risks.
To put the case in point, the gearing of a business trust can go beyond 100 percent. For both business trust and REIT that provide similar returns, a REIT with a gearing limit of 35 percent would be of a lower risk. Nonetheless, a high gearing level is not necessarily bad as the trust could expand much faster with more readily available funds. However, a business trust may also surprise their unitholders with changes to their payout in times of difficulties as it does not have a minimum payout policy like the REITs. Hence, it ultimately boils down to the risk tolerance of the investor and the individual’s investment goals.
So, REIT Or Business Trust?
This is perhaps the biggest question hanging over our heads. With yield plays the hot favourite in this low interest rate and high liquidity environment, much of the attention have been on REITs instead of the lesser known business trusts. It is not difficult to wonder why, given the REITs’ outstanding performance and business trusts’ lacklustre showing thus far. From the start of this year till 23 May, REITs recorded an average of 11.8 percent gains in share price while business trusts averaged 4.3 percent and stapled securities at 2.2 percent.
However, as newly-listed business trust Croesus Retail Trust cruised to post double-digit gains on its debut, one has got to wonder if the tide has turned for business trusts that were once surrounded by skepticism.
Performance Table On Business Trusts And REITs
Source: Compiled from information on the Singapore Exchange
*Yield for the period from company’s listing to its financial year end
Average computation excludes newly listed trusts in 2012 and 2013
Notably, there are also instances where business trusts outperform the REITs. To be specific, we take a closer look into Perennial China Retail Trust (PCRT) and CapitaRetail China Trust (CRCT), which are both operating in the China retail market. PCRT has recorded price gains of 6.2 percent as at 23 May and a dividend yield of 6.4 percent while CRCT’s shares have fallen by 3 percent over the same period with dividend yield of close to 6 percent. In this comparison, the outperformance by PCRT may be attributed to investors factoring in the potential growth PCRT have as it undertakes development properties while existing development properties turn income-producing.
That said, one noteworthy point is that the performance of a trust is largely dependent on its underlying business, quality of assets and operating business environment. Making references from the performance table, we can see the varying share price performances within business trusts that are grouped under real estate related and non-real estate related. The business trusts that are real estate related beat those that are non-real estate related hands down with a capital gain of 6.9 percent compared to 2.5 percent for the latter.
If you take a closer look at the trusts listed under the non-real estate related segment, you would also realise that they can be broadly classified as defensive or cyclical assets. And that is where a pattern emerges. Defensive stocks that are backed by infrastructure or healthcare assets are faring well while the same cannot be said about cyclical stocks. With the exception of Hutchison Port Holdings Trust, shipping trusts sank into negative territories, albeit the impact were mitigated by decent yields.
In addition to this distinctive classification, investors should recognise that the capital structure as well as business strategy employed play a huge part in determining whether expansion is an aim for the trust in the interim.
With that in mind, it pays to understand what each trust offer in terms of growth and yield. While the wider range of assets a business trust can hold may leave investors spoilt for choice, the need to take a selective approach still stands.