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Despite being affected by the large amount of incoming supply of office, industrial and retail space entering the market between 2016 to 2018, as well as the rising interest rates, Singapore real estate investment trusts (S-REITs) will remain resilient, the findings by a stress test conducted by the Monetary Authority of Singapore (MAS) showed.
To ensure their capability of handling a cooldown in the leasing market given the supply glut, the central bank has conducted a stress test on S-REITs with sizeable office, industrial and retail properties in the republic. This took into account higher vacancy, lower rents alongside an increase in interest rates.
“While pre-commitments for major upcoming office and industrial developments appear to be on track, overall demand for rental space could soften alongside slowing domestic economic activity,” it said in its latest annual Financial Stability Review (FSR).
“This could put some pressure on occupancy rates and rents in the next few years as completions peak. Weaker rental incomes could in turn adversely affect their ability to meet interest payments and sustain distributions to investors.”
“Under a severe stress scenario where earnings before interest, tax, depreciation and amortization (EBITDA) decline by 35 percent and interest rates increase by 3 percentage points, the median Interest Coverage Ratios (ICRs) of office, industrial and retail S-REITs remain around, 1.9, 2.4 and 1.8 times respectively.
An ICR above one means the company is generating sufficient revenues to satisfy its interest expenses, while a lower figure indicates that a firm will likely need to tap its cash reserves in order to meet a shortfall in interest payments.
Based on the severe stress, S-REITs have the wherewithal to handle to sever stress scenarios. This suggests S-REITs with significant office, industrial, and retail properties here are capable of fulfilling their debt obligations even if the rental market slows down and interest rates spike.
“Nonetheless, the current macroeconomic headwinds and the peak in completions of new office, industrial and retail properties between 2016 and 2018 could pose some risks to maintaining dividend payouts while still meeting debt service obligations.” The central bank also advised investors to exercise caution in investing in such entities.
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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