The Monetary Authority of Singapore (MAS) recently released a proposal to raise REITs’ leverage limit from the current ceiling of 45% to possibly as high as 50% to 60%, subject to the REIT maintaining an appropriate interest coverage ratio (ICR). This may bring Singapore closer in line with international REITs, some of which either have higher gearing ceilings or no ceilings at all.
According to this SGX article, the average gearing ratio for Singapore REITs as a whole is around 34% to 35%. This level of gearing allows REITs to take on additional debt to fund acquisitions, but depending on the amount of debt taken up, it may also push the gearing level closer to the 40% mark. Though 40% is still below the 45% threshold, most REITs will not gear up beyond 40% at the moment as they want to allow themselves some leeway in case they need to take up short-term loans (such as bridging loans).
REITs with a low cost of debt and an adequately high ICR are most likely to benefit from the raising of the limit as they have access to a lot of cheap debt. Here are four REITs that are likely to benefit greatly from this change.
1. Parkway Life REIT
Parkway Life REIT (SGX: C2PU), or PLife REIT, is Asia’s largest listed healthcare REIT by asset size. The REIT owns a portfolio of 50 properties with a total portfolio size of S$1.86 billion as of 31 March 2019. In addition, it has 46 assets located in Japan, comprising nursing homes and one pharmaceutical product distributing and manufacturing facility.
PLife REIT’s cost of debt was 0.9%, and it had an ICR of 13.2 times, and this is the lowest cost of debt among all the Singapore REITs. With such a healthy ICR, the REIT should have no problems servicing its debt should it take on additional borrowings.
2. Cromwell European REIT
Cromwell European REIT (SGX: CNNU) invests in properties in Europe that are used primarily for office, light industrial, logistics, and retail purposes. It has a portfolio of 97 properties in countries such as Denmark, Finland, France, and Poland, to name a few.
Because the REIT is able to borrow money in Europe at low rates, the REIT’s cost of debt is a mere 1.4%, along with ICR of 9.2 times.
3. Keppel DC REIT
Keppel DC REIT (SGX: AJBU) is the first pure data centre REIT listed in Asia. Its portfolio comprises 15 high-quality data centres located in key data centre hubs totaling a net lettable area of around 1.1 million square feet. The portfolio spans 10 cities in eight countries in Europe and Asia Pacific.
Due to Keppel DC REIT having a strong parent, its cost of debt is just 1.7%, and it has an ICR of 12.9 times.
4. IREIT Global
IREIT Global (SGX: UD1U) invests in European properties that are used primarily for office, retail, and industrial business. Its portfolio consists of five freehold properties located in the German cities of Berlin, Bonn, Darmstadt, Munster, and Munich.
IREIT Global is also investing in Europe, similar to Cromwell, and therefore enjoys a low cost of debt of 1.5%, along with ICR of 10.0 times.
Stay alert for gearing limit announcements
Investors should continue to look out for announcements relating to the gearing limit being raised, as this is not a done deal yet. But if the legislation is passed, the four REITs above will stand to benefit the most as they have the lowest cost of debt among all Singapore REITs, as well as very high ICRs.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Parkway Life REIT. Motley Fool Singapore contributor Royston Yang owns shares in Keppel DC REIT.