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The Monetary Authority of Singapore’s (MAS) has proposed to raise S-Reits’ leverage limits to up to 55 percent.
A higher gearing limit would enable S-Reits to better compete with property funds, private equity funds and foreign Reits that may have more debt headroom for acquisitions.
Credit Suisse expects valuations of Singapore Reits to remain elevated after hitting their previous highs and the search for yield to continue as interest rates continue to be low amid bleak economic and trade outlook, reported The Business Times.
“We favour retail Reits, but see profit-taking opportunities in select office, industrial and hospitality Reits where valuations are getting richer even as operating fundamentals are turning more challenging,” said Credit Suisse head of South-east Asia research Kum Soek Ching.
“An increase in gearing limit, as proposed by the regulator, should give wings to S-Reits’ (Singapore real estate investment trusts) acquisitive pursuits.”
The Monetary Authority of Singapore’s (MAS) has proposed to raise S-Reits’ leverage limits from the current 45 percent to between 50 and 55 percent. Kum believes the proposition is timely as acquisitions could pick up steam.
A higher gearing limit would enable S-Reits to better compete with property funds, private equity funds and foreign Reits that may have more debt headroom for acquisitions.
Credit Suisse revealed that Reits in other markets are subject to higher gearing limits or none at all. Reits in Malaysia are subject to a 50 percent gearing limit, while those in Thailand to 60 percent. Reits in Australia, Japan and the US are not subject to any gearing limit.
With this, S-Reits are expected to take advantage of their higher valuations to raise equity.
“With the prospect of greater flexibility in capital allocation, the risk of opportunistic equity fundraising (that is not backed by an acquisition) is likely to diminish,” said Credit Suisse.
After appreciating 18 percent year-to-date, S-Reits’ yield spread stands at 3.4 percent versus the 10-year government bond, compared to a 3.8 percent historical average or 4.36 percent following the global financial crisis.
“While S-Reit valuations look as rich as it can get relative to history, the search for yield in a lower-for-longer interest rate environment could provide more mileage to the outperformance of defensive yield stocks,” said Kum.
“Distribution yields from S-Reits do not look unattractive relative to Reits in other developed markets. If the US Federal Reserve (Fed) is perceived to under-deliver against market expectation of a 40 basis point Fed rate cuts by Q4 2019, yield stocks could come under pressure.”
Victor Kang, Digital Content Specialist at PropertyGuru, edited this story. To contact him about this or other stories, email victorkang@propertyguru.com.sg
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