SINGAPORE - If the leverage limit for Singapore real estate investment trusts (S-Reits) is raised above the current 45 per cent limit, debt markets can no longer take a "broad-brush" approach and assume S-Reits are "low-risk".
Instead, Reits need to be assessed on a case-by-case basis as the financial discipline of their managers is crucial, said OCBC credit analyst Seow Zhi Qi. She was speaking in response to the Monetary Authority of Singapore (MAS) consultation paper proposing changes to the Singapore Reits sector released earlier this month.
Although Reits would be able to make acquisitions and propel earnings with the large debt headroom given by a higher leverage limit, there may be higher credit risk.
This is because some properties may not have been accretive for unitholders based on the 45 per cent leverage limit, but are accretive to unitholders with a 50 to 55 per cent leverage limit, as more debt can be used to fund the acquisition versus using more equity.
Moreover, Reits have been seen as a "lower risk and low growth" asset class able to generate stable income to pay capital source providers such as bank debt, bonds, and perpetual and equity holders.
"As such, it is questionable whether growth in and of itself is a good thing for bondholders," Ms Seow said.
In addition, a higher leverage limit may weaken the credit metrics of Reits which have historically and generally kept their aggregate leverage within 40 per cent despite the allowed limit of 45 per cent.
Stretching their leverage to 50 to 55 per cent would broadly translate to a net gearing of 1.0 to 1.2 times, which OCBC said is higher than its estimate average net gearing of 0.53 times as at March 31.
With changes to the aggregate leverage, the net gearing of Reits, typically lower than that of property developers, could inch higher and come close to property developers'.
Ms Seow added that the proposed changes will likely benefit perpetual holders of healthy Reits, as well as the sponsors of the Reits.
Perp holders will benefit as the call risk of perpetuals of healthy Reits would disappear due to the enlarged debt headroom. It can then raise "relatively cheaper" senior debt to refinance its perps at first call for non-trivial cost savings.
"Consequentially, over the medium term, we can expect fewer Reit perpetuals to come to market and instead continue to see senior debt issuances," she added.
Meanwhile, sponsors would benefit as they would be able to inject properties with greater ease into the Reits from a financial standpoint, including sizeable ones. This is because the cost of debt is lower than the cost of equity.
OCBC is of the view that more properties would become accretive to unitholders on a levered basis and "getting blessed by unitholders".
As sponsors also typically own at least part of the Reit's managers and Reit manager fees tend to be linked to asset bases, having a sponsor pipeline is beneficial to Reits in terms of growth, although this benefit to bondholders is "less apparent given bondholders do not share in the upside", Ms Seow added.
Lastly, raising the leverage limit would help bolster the competitiveness of the Singapore Exchange, whose leverage limit is currently at the "stricter end" of the spectrum.
While Singapore and Hong Kong impose a leverage limit of 45 per cent, Malaysia imposes a 50 per cent limit, while Thailand allows a leverage limit of up to 60 per cent with an investment grade credit rating. The US, meanwhile, does not impose any leverage limit.
Safeguards suggested by OCBC in relation to raising the leverage limit include a tighter Ebitda/interest coverage than the suggested 2.5 times - where Ebitda is earnings before interest, taxes, depreciation and amortisation - and a cap on the secured debt a Reit could take relative to its total asset value.