Singapore (12 July): On July 2, the Monetary Authority of Singapore published a consultation paper to consider raising the regulatory gearing limit (debt-to-asset ratio) for real estate investment trusts from the current 45%, and to introduce a minimum interest coverage ratio (ICR).
Through the paper, MAS also aimed to seek views on whether S-REITs with a higher ICR threshold should be allowed a higher leverage, say 55%.
Hong Kong imposes a leverage limit of 45% while Malaysia imposes a 50% limit. Thailand allows REITs to leverage up to 60% if they have an investment-grade credit rating, while countries such as Belgium, Germany and the Netherlands have limits ranging from 60% to 66.25%.
To promote market transparency, MAS also proposes to require REITs to disclose both their leverage ratios and ICRs in interim result announcements and annual reports. MAS notes that 70%-75% of S-REITS disclose their ICRs currently, particularly REITS with sponsors.
And while REIT managers seemed to welcome the consultation paper, they remained doubtful over this would impact the classification of perpetual securities.
Perpetual securities are a popular choice amongst S-REITS, with some 10 companies having issued them over the years – including Ascott Residence Trust, Keppel and Mapletree Logistics Trust.
However, in the past two years, perpetual securities have earned a bad reputation - following Hyflux’s default of $900 million of retail perpetual securities and preference shares.
In addition, analysts have pointed out that perpetual securities understate a REIT’s actual leverage and this can be dangerous.
To find out more about the MAS consultation paper and how REITS are reacting to it, read REIT managers welcome MAS consultation paper, question hangs over classification of perpetual securities in The Edge Singapore (Issue 890, week of July 15) which is on sale now.
