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What Should Investors Do About The New REIT Regulations Proposed By MAS?

The Monetary Authority of Singapore (MAS) released a consultation paper on Thursday which contained several proposals to strengthen the real estate investment trust (REIT) market.

I wrote a summary of the proposed changes here. In this article, I would like to write about how this may change the way we look at REITs.

A REIT’s ability to allocate capital

A lot of traits which we look for in a sustainable REIT should not change. As Foolish investors, we still need to consider the ability of a REIT to secure good properties at reasonable prices and increase the net property income (NPI) of its purchased properties.

The proposed regulatory changes may make it easier for a REIT to fund its activities (part of the changes involves the increase of a REIT’s leverage limit), but it is likely a good thing only if we put more cash in the hands of a REIT with good capital allocation skills – putting more cash in the hands of a REIT with poor ability to allocate capital may not be the smartest thing to do.

A REIT’s ability to borrow money smartly

Along this vein, REITs should also show the ability to secure competitive borrowing rates and demonstrate flexibility in securing funding across different economic climates. Having fewer limits on a REIT’s ability to borrow does not preclude a REIT from having to display this trait.

A REIT’s economic characteristics

The economic characteristics of REITs from different sectors would also not be affected (for better or worse) by this round of proposed changes in the regulatory environment.

For instance, REITs such as  Suntec Real Estate Investment Trust (SGX: T82U) and CapitaCommercial Trust (SGX: C61U), which are both in the office rental sector for REITs, are affected by the demand and supply of different grades of office rental space and the ability of Singapore to attract new companies to set up shop here.

On the other hand, hospitality REITs like CDL Hospitality Trusts (SGX: J85) are influenced by a completely different set of factors such as tourist arrivals in Singapore and the supply of hotel rooms in our country.

In short, individual REITs will still need to deal with the inherent idiosyncrasies  in their own sectors.

Using the “too hard” pile

If and when leverage limits for REITs are increased in the future as per MAS’ proposed changes, it might be prudent for Foolish Investors to consider tossing highly leveraged REITs in volatile sectors into the “too hard” pile. If a sneeze in the economy can produce wild swings in the income from a REIT’s properties’, then having elevated debt obligations over the long-term could be damaging for a REIT and its investors, to say the least.

Foolish take away

Ultimately, MAS’ proposed regulatory changes shouldn’t affect how investors view the long-term business fundamentals of a REIT. Most of the changes – such as the proposal to enhance disclosure standards – would likely allow investors a better opportunity to study REIT managers’ incentives and their operational know-how. But the rule changes would not change how good or bad a REIT is.

At the end, Foolish investors would still be better served only if they focus on REITs which have good quality properties and a capable management team in place who are able to create value over the long-term.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong owns shares in Suntec REIT.