To help Singapore real estate investment trusts (S-Reits) better compete against private capital and foreign Reits when making real estate acquisitions, the Monetary Authority of Singapore (MAS) yesterday published a consultation paper proposing changes to their current leverage limit of 45 per cent.
MAS said it is proposing these amendments to the Code on Collective Investment Schemes to "provide S-Reits with more flexibility to manage their capital structure, and to streamline the fundraising process for Reits".
It is inviting views and suggestions on possible ways that the leverage limit can be recalibrated. All written comments have to be submitted by Aug 1.
MAS said one possible approach is to use a combination of leverage limit and minimum interest coverage requirement (ICR) in determining the amount of leverage that Reits can take on. Reits may take on higher leverage if they are able to meet a minimum ICR.
This approach gives Reits more flexibility to optimise their capital structure when bidding for assets, with the minimum ICR serving as an additional safeguard by encouraging Reits to carefully assess their debt-servicing ability when taking on additional debt.
MAS is considering allowing a Reit's leverage to exceed 45 per cent but not more than 50 per cent, if the Reit has a minimum ICR of 2.5 times after taking into account the interest payments arising from the new debt.
It is seeking views on whether a Reit that has demonstrated good financial discipline, such as having a higher ICR threshold, should be allowed a higher leverage.
At the Reit Association of Singapore's annual conference yesterday, MAS executive director Abigail Ng said the central bank has been looking closely at the leverage limit of Reits.
There has been feedback that at the current leverage limit of 45 per cent, Reits face challenges competing against other bidders such as private equity funds, property companies and foreign Reits, she said.
"These bidders often have more flexibility to use debt to optimise their capital structure," she added.
Singapore and Hong Kong set a leverage limit of 45 per cent while Malaysia has a 50 per cent limit. Thailand allows Reits to leverage up to 60 per cent if they have an investment-grade credit rating. Belgium, Germany and the Netherlands have limits ranging from 60 per cent to 66.25 per cent.
There is no leverage limit in the US, Canada, Australia, France and Japan. The UK has no leverage limit but requires Reits to maintain a minimum ICR of 1.25 times.
"We have undertaken a review of this area, and we see some room for recalibration," said Ms Ng.
Previously, S-Reits could borrow up to 35 per cent of their total assets, with the limit bumped up to 60 per cent if the Reit obtained a credit rating from a ratings agency and disclosed it to the public.
In 2015, MAS proposed replacing this with a single-tier leverage limit of 45 per cent.
