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PLANS by the Monetary Authority of Singapore (MAS) to strengthen the city-state's real estate investment trust (Reit) market will provide a positive boost for the local Reit and property sector.
In a report released on Friday, DBS Group Research said when passed, the proposals could result in lower fees as well as greater transparency and alignment between Reits and unit holders.
"This should increase confidence and attractiveness of Reits to investors. A strong and functioning Reit sector is also a long-term positive for sponsor/property developers who have another avenue to recycle assets efficiently," the research house noted.
Among DBS' top picks for the sector are Cache Logistics Trust (target price: S$1.37 a unit); Frasers Centrepoint Trust (TP: S$2.04); Frasers Commercial Trust (TP: S$1.49); Mapletree Commercial Trust (TP: S$1.46) and Mapletree Greater China Commercial Trust (TP: S$1.04).
However, the proposals when passed could potentially have a "detrimental impact" on ARA, which is estimated to derive about 55-60 per cent of its revenues from fees from its managed Reits. "When passed, we might see earnings cut when implemented in 2016," DBS Group Research added.
Late Thursday, the MAS released a consultation paper suggesting potential tweaks to the regulatory regime governing Reits and their managers. Key proposals include:
(i) improving the corporate governance and disclosures for Reit managers;
(ii) minimising instances of "conflicts of interests" between Reit managers and investors through refining Reit managers' compensation methodologies; and
(iii) operational tweaks like having Reits adhere to a higher leverage limit of 45 per cent (versus 35 per cent now) and eliminating the 60 per cent cap on Reits with a credit limit.
In addition, the MAS has also proposed to raise the development limit for Reits to 25 per cent from the current 10 per cent of total assets. These measures are likely to be implemented from Jan 1, 2016.
DBS Group Research said the adoption of a single-tier gearing limit of 45 per cent will allow more flexibility in acquisitions. "This will also place S-Reits in line with regulations in Malaysia/Hong Kong which have gearing limits of 45 per cent and 50 per cent, respectively," it pointed out.
It also warned that proposals to raise the development limit to 25 per cent of deposited properties could result in potentially higher earnings volatility for an otherwise stable sector.