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The central bank’s move to amend the rules governing Singapore real estate investment trusts (S-REITS) is credit positive for the industry, according to New York-based ratings agency Moody’s.
In particular, imposing a single-tier cap on leverage ratios would decrease overall refinancing risk in the industry as around 66 percent of REITs in Singapore are rated. Leverage ratios represent an entity’s outstanding debt divided by the total value of its existing assets.
“A lower borrowing limit for rated S-REITs will ensure the REITs maintain a prudent approach when funding expansion plans and so reduce potential losses to creditors,” said Moody’s Assistant Vice President Jacintha Poh.
Previously, unrated S-REITs were allowed to loan as much as 35 percent of their assets’ total value, while rated trusts could leverage up to 60 percent. But under the new rules recently introduced by the Monetary Authority of Singapore (MAS), all REIT borrowings are capped at 45 percent regardless whether they are rated or not.
Moreover, leverage ratios of the 19 S-REITs rated by Moody’s were all below this limit as of 31 March 2015, and these trusts are unlikely to exceed that level despite an acquisition spree by some of them.
According to Moody’s, while the central bank’s move to raise S-REIT’s development limit to 25 percent of their deposited property’s value from 10 percent previously is marginally credit negative as this exposes them to greater risks and uncertainties linked to property development, it could provide them with more flexibility to renovate older properties to boost rental yields and improve financial performance.
Additionally, the extra 15 percent development limit can only be utilised by a trust after it has secured the approval of its unit holders. For redevelopments, the property must have been held by the REIT for at least three years before the redevelopment and at least three years thereafter.
Nikki De Guzman, Editor at CommercialGuru, wrote this story. To contact her about this or other stories email nikki@propertyguru.com.sg
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