Measures unveiled to help Reits through 'challenging' Covid-19 period

REAL estate investment trusts listed on the Singapore Exchange (S-Reits) will soon benefit from new measures that will give them greater flexibility to manage their cash flows and raise funds amid an operating environment made challenging by Covid-19.

These measures announced on Thursday comprise an extension of the deadline for distribution of taxable income by the Ministry of Finance (MOF) and the Inland Revenue Authority of Singapore (Iras), as well as a raising of the leverage limit and deferment of new regulatory requirements by the Monetary Authority of Singapore (MAS).

MOF and Iras said they will extend the timeline for S-Reits to distribute at least 90 per cent of their taxable income from three months to 12 months (after the end of FY2020) to qualify for tax transparency.

This extension is applicable only for distributions made from taxable income derived by an S-Reit in FY2020. For example, to avail of the tax transparency treatment for FY2020 taxable income, S-Reits with FY2020 ending between March 31, 2020 and Dec 31, 2020 will have up to March 31, 2021 and Dec 31, 2021 respectively to distribute to their unitholders at least 90 per cent of their taxable income derived in FY2020.

"The extension will give S-Reits more flexibility to manage their cash flow.  As S-Reits typically distribute the bulk of their income to unitholders, they tend to hold lower cash reserves," they said.

Iras added that it will provide further details of the change by early May 2020. 

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At the same time, MAS will raise, with immediate effect, the leverage limit for S-Reits from 45 per cent to 50 per cent, to provide S-Reits greater flexibility to manage their capital structure.

MAS will defer to Jan 1, 2022 the implementation of a new minimum interest coverage ratio (ICR) requirement. In its public consultation last year, it had proposed to require S-Reits to have a minimum ICR of 2.5 times before they are allowed to increase their leverage to beyond the prevailing 45 per cent limit, up to 50 per cent.

"The implementation of the ICR requirement will now be deferred, as S-Reits' ICRs are likely to come under pressure in the near term due to the negative impact of the Covid-19 pandemic on their earnings and cash-flows," the central bank said. 

The higher leverage limit, together with the enhanced share issue limit announced by Singapore Exchange Regulation last week, will give S-Reits continued access to different funding channels, including borrowing from banks, issuing bonds and raising equity, it added. 

MAS added that it will also require S-Reits to disclose their leverage ratios and ICRs in annual reports and interim financial results to provide investors with timely information about their financial position and the impact of higher leverage on their risk profiles.

"Notwithstanding the higher leverage limit, MAS expects S-Reit managers to carefully assess their ability to service financial obligations before taking on additional debt," it added.

Earlier this month, the Reit Association of Singapore (Reitas) had cautioned against putting "significant strain" on landlords' finances with a new Bill that may give businesses a reprieve from contractual obligations including rent payments, even as it acknowledged the importance of supporting tenants in the crisis.

Reitas had flagged that the suspension of rent essentially deprives a Reit of its main source of income for up to six months. It said that the low rental cash flow thus places "significant strain" on the Reit's ability to service its own financial and operational obligations, and the stress is made more acute by Reits having to pay out 90 per cent of their annual distributable income in order to qualify for tax exemption.

In addition, the interruption of revenue may lower Reits' financial standings in terms of metrics such as leverage, capital adequacy and valuation. This may in turn lead to financial problems for Reits, from increased borrowing costs to difficulty in obtaining both debt and equity capital, at "precisely the time when it may be critically needed".