A new refined regulatory proposal for real estate investment trusts (REIT) in Singapore was released recently by the Monetary Authority of Singapore (MAS). Within it are a few key changes worth noting. One in particular dealt with REITs’ leverage and development limits. Here’s a snippet taken from the MAS release:
“The development limit of a REIT will be increased from 10% to 25% of its deposited property. In addition, the leverage limit imposed on a REIT will be increased from 35% to 45% of the REIT’s total assets, but a REIT will no longer be allowed to leverage up to 60% with a credit rating.”
Which REIT may be impacted?
At the moment most of the REITs in Singapore are comfortably below the 45% leverage limit that MAS is proposing. I have summarized a selection of REITs in Singapore together with their last-reported gearing ratios.
|Keppel REIT (SGX: K71U)||42.4%|
|Ascott Residence Trust (SGX: A68U)||38.7%|
|OUE Commercial Real Estate Investment TR (SGX: TSoU)||38.6%|
|Frasers Hospitality Trust (SGX: ACV)||38.4%|
|Frasers Commercial Trust (SGX: ND8U)||37.2%|
|Cache Logistics Trust (SGX: K2LU)||36.6%|
|Mapletree Commercial Trust (SGX: N2IU)||36.4%|
|Mapletree Greater China Commercial Trust (SGX: RW0U)||36.2%|
|Starhill Global Real Estate Invmt Trust (SGX: P40U)||35.3%|
|Suntec Real Estate Investment Trust (SGX: T82U)||34.8%|
|Parkway Life REIT (SGX: C2PU)||34.4%|
|Mapletree Logistics Trust (SGX: M44U)||34.3%|
|Capitaland Mall Trust (SGX: C38U)||33.8%|
|Ascendas Real Estate Investment Trust (SGX: A17U)||33.5%|
|CDL Hospitality Trusts (SGX:J85)||32.3%|
|Far East Hospitality Trust (SGX: Q5T)||31.5%|
|AIMS AMP Capital Industrial REIT (SGX: O5RU)||31.4%|
|Mapletree Industrial Trust (SGX: ME8U)||30.6%|
|CapitaLand Commercial Trust (SGX: C61U)||29.9%|
|Frasers Centrepoint Trust (SGX: J69U)||28.6%|
|SPH REIT (SGX: SK6U)||26.0%|
Source: Company Earnings Presentation
As you can see from the list above, only Keppel REIT has a gearing ratio that exceeds 40% currently. The 45% leverage limit may cap the REIT’s ability to pick up additional debt to fund new purchases; an alternative funding approach for the REIT may be to issue new units.
On the other end of the spectrum, SPH REIT has the lowest gearing ratio at 26%.
It’s also notable that the ruling will only affect the REIT component of a stapled security. As a note, one stapled security of a trust comprises a pair of a real estate investment trust (REIT) and a business trust. Here’s the snippet from MAS regarding this proposal:
“MAS will also continue to allow stapled securities structures with a REIT component to operate without group operational limits. The REIT component will continue to be subject to existing limits.”
This would mean that investors will need to evaluate the proportion of gearing undertaken by the business trust portion versus the REIT component. Examples of stapled trusts include CDL Hospitality Trust, Far East Hospitality Trust and Ascendas Hospitality Trust. In the latter case, the gearing for Ascendas Hospitality Business Trust and Ascendas Hospitality REIT are 42.3% and 28.2% respectively.
As mentioned earlier, the development for REITs will also be increased.
At the moment there are REITs like Ascendas REIT which are venturing into greenfield development of properties. In its latest earnings report, it had $45.5 million in properties under development.
That’s all I have for now – I hope you found this helpful.
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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 Parkway Life REIT, Suntec REIT and Mapletree Logistics REIT.