MAS mulls raising leverage limit for Singapore Reits

IN A move 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) on Tuesday 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 thus inviting views and suggestions on possible ways that the leverage limit can be recalibrated. All written comments have to be submitted by Aug 1, 2019.

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.

Under this approach, 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 also seeking views on whether it is appropriate for a Reit that has demonstrated good financial discipline, such as having a higher ICR threshold, to be allowed a higher leverage, say 55 per cent.

At the Reit Association of Singapore's annual conference on Tuesday, Abigail Ng, MAS executive director, said the central bank has been looking closely at the leverage limit of Reits.

"The industry has provided feedback that at the current leverage limit of 45 per cent, Reits face challenges when competing against other bidders such as private equity funds, property companies and foreign Reits. These bidders often have more flexibility to use debt to optimise their capital structure. Some have also pointed out that other Reit jurisdictions have higher or no leverage limits."

Singapore and Hong Kong impose a leverage limit of 45 per cent while Malaysia imposes 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 Netherlands have limits ranging from 60 per cent to 66.25 per cent. 

The US, Canada, Australia, France and Japan, on the other hand, do not impose any leverage limit. The UK also does not impose any 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. We have some ideas on how to do this, and would also like to hear views and suggestions on other possible approaches and methods to recalibrating the leverage limit."

Previously, S-Reits were allowed to borrow up to 35 per cent of their total assets; the limit can be bumped up to 60 per cent if the Reit obtains a credit rating from a ratings agency and discloses it to the public.

In 2015, MAS proposed to replace this with a single-tier leverage limit of 45 per cent, thus removing the option for a Reit to leverage up to 60 per cent by obtaining a credit rating.