You will be able to explain why S-REITs pay out most of their income and what that means for growth.
Darren compared his REIT with a property developer listed on SGX. The developer kept most of its profit and paid out a small dividend. His REIT paid out almost everything it earned, every half year, like clockwork. He wondered why anyone would run a property business that way, and what it meant for how the REIT could ever grow.
The answer is a tax rule, and it shapes almost everything else you will read about S-REITs.
Companies in Singapore pay corporate tax on their profits. A REIT is not a company, it is a trust, and IRAS has a specific treatment for it.
Under IRAS rules, an S-REIT that distributes at least 90% of its taxable income to unitholders in the same year can be granted tax transparency. That means the trustee is not taxed on the income it distributes. Tax, where it applies, is assessed at the unitholder level instead. The REIT becomes a pass-through: rent comes in, costs and interest go out, and most of what is left goes to unitholders without being taxed at the trust level first.
The conditions and the details of the treatment are set out by IRAS, and you can read the current version in its guidance on REITs on the IRAS website. For this course, the main fact is that 90% figure, and the consequence that S-REITs distribute at least that much of their taxable income, and many distribute all of it.
With made-up figures, a REIT with S$100 million of taxable income must distribute at least S$90 million to get the treatment. In practice, many managers distribute close to the full S$100 million.
Tax transparency moves tax from the REIT to the unitholder, so the next question is what the unitholder pays.
For individuals, the answer is usually nothing. IRAS generally exempts individuals who hold S-REIT units directly from tax on these distributions. There are exceptions, such as income received through a partnership or as part of a trade, and they are listed in the IRAS guidance, but for most people holding units in their own name for investment, the distributions arrive tax-free.
Lesson 1.3, Tax, CDP and where the cash lands, covered the one-tier system for company dividends. The two routes are different in law, one-tier for companies and tax transparency for REITs, but for most individual investors the practical result is similar.
Some S-REITs own overseas properties, and that income may be taxed in the country where it was earned before it reaches the REIT. Lesson 6.4, Overseas properties and currency risk, covers that.
Now go back to Darren's question. A developer keeps most of its profit and can use it to buy land, build and grow. A REIT that pays out 90% or more keeps very little.
Using the made-up figures above, a REIT that distributes S$90 million of S$100 million keeps at most S$10 million in a year. A single new property can cost several hundred million dollars. Retained income will never fund that.
So S-REITs grow by raising money from outside, in two ways. They borrow, which adds debt. And they issue new units, through rights issues, preferential offerings and placements, which brings in new equity. Most acquisitions use some of both.
That makes S-REITs different from most companies you might hold for dividends. A company that grows from retained profit can increase its dividend without asking anyone for money. A REIT that wants to grow almost always has to ask, either lenders or unitholders.
This leads straight to the two areas the rest of the course spends most time on.
The first is debt. Because REITs borrow to grow, how much they owe, what it costs and when it falls due decides how much of their income reaches you. MAS sets limits on REIT borrowing, which lesson 4.4, How MAS regulates S-REITs, introduces. Module 5 shows you how to read gearing, interest coverage and the debt profile.
The second is new units. Every time a REIT issues units, the income is shared across more of them. If the new property earns enough, your distribution per unit rises. If it does not, it falls, even while the REIT gets bigger. Module 7 covers rights issues and placements and how to judge them.
The payout rule is good for income investors: it is why S-REITs pay what they do. But it also means a REIT's growth depends on borrowing and on raising new money from you and others.
Every S-REIT states its distribution policy in its prospectus and annual report: what share of distributable income it pays out and how often, typically quarterly or half-yearly. It is usually a short paragraph, sometimes in the section on distributions or in the notes.
In the activity you will find that paragraph for one S-REIT and record what it commits to, which is the baseline you will compare its actual payouts against in module 5.
Read one S-REIT's distribution policy in its annual report and write what share of income it pays out and how often.
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