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Singapore real estate investment trusts (S-REITs) will find it harder to fund future acquisitions with debt due to higher borrowing cost amid the anticipated interest rate hike and the leverage ratio ceiling imposed by the central bank, a report from OCBC revealed.
Last month, the Monetary Authority of Singapore (MAS) raised the leverage limit for REITs from 35 percent to 45 percent of their total assets, but those with a credit rating are no longer permitted to loan up to 60 percent of their total assets.
Given this tighter debt headroom, REITs cannot fully finance their acquisitions with debt alone and they may need to raise funds via other methods like equity financing, whereby the company sells stocks to investors.
“We foresee more equity financing for future acquisitions. Given the dilutive and costlier nature of equity, we believe REITs would find it harder to make DPU accretive acquisitions. This would limit DPU growth ahead,” said the financial institution.
Furthermore, the situation could be aggravated by the likelihood that capital values could weaken once interest rates start their upward movement.
“The higher borrowing costs would dampen investors’ purchasing power. A higher discount rate may also be adopted by valuers. Ultimately, whether capital values do decline during a rising interest rate environment depends on the health of the economy. While the U.S. economy is improving, the global economy is still fraught with vagaries,” added OCBC.
Nikki De Guzman, Editor at CommercialGuru, edited this story. To contact her about this or other stories email nikki@propertyguru.com.sg
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