Relaxed Reit rules
In this issue:
- MAS proposes higher leverage limit for all Reits
- ValueMax unit gets warm welcome
Greetings dear reader,
It has been said that the Singapore market is, at heart, a real estate investment trust (Reit) market. Last week’s announcement by the Monetary Authority of Singapore (MAS) delivered a jolt to that heart – but was it for better, for worse, or for nothing at all?
On Jul 24, MAS published a consultation paper that proposes:
- Subjecting all Reits to a minimum interest coverage ratio (ICR) threshold of 1.5 times
- Allowing all Reits an aggregate leverage limit of 50 per cent
MAS described the proposal as one that “simplifies leverage requirements for the sector”, but industry participants immediately caught on that it would amount to a relaxation of existing requirements.
I’ll get into the market reactions further down, as well as examine some of the excitement happening across the Causeway in Malaysia.
What’s happening?
Singapore-listed Reits (S-Reits) are supposed to keep their aggregate leverage below 45 per cent. If they want to raise this leverage to 50 per cent, they have to maintain an ICR of 2.5 times.
My colleague Raphael Lim had foreshadowed this development in September last year, as falling property valuations pushed Reit leverage levels up.
His poll of industry participants yielded mixed results. A relaxation of the leverage limits could be valuable to investors if, for instance, Reits borrowed the money for asset enhancement initiatives. Doing so also helps remove an overhang on the counter, created because investors worry that the Reit will be forced to raise money at a discount.
Yet, several people also highlighted increased risks for investors. Ultimately, as my colleague Raphael argued in a commentary, investors would flock towards those Reits with stronger balance sheets anyway.
Why it matters?
The day after the announcement, Jul 25, most S-Reits ended the day down. CapitaLand Integrated Commercial Trust, First Reit and BHG Retail Reit were the only ones in positive territory. The worst performer was OUE Reit, down 5.2 per cent.
It would be difficult to ascribe this negative performance to the new rules, though. OUE Reit had just reported an 11.4 per cent decline in its distribution per unit for the first half of the year – thanks to an 18.5 per cent increase in finance costs.
The benchmark Straits Times Index also ended in the red that day, falling 0.88 per cent. There were 372 decliners, versus 220 advancers. Across Asia, markets were mostly down too.
So, should investors be optimistic about these rules, or pessimistic? Analysts said most Reits actually have leverage ratios comfortably below the 45 per cent limit anyway, and ICRs in excess of 2.5. DBS Group Research noted in a report that the S-Reit sector has an average ICR of 3.9.
Reits with weaker financial ratios are Lendlease Global Commercial Reit, Keppel Reit, Suntec Reit and Mapletree Pan Asia Commercial Trust. These could see some benefit, DBS said.
OCBC Investment Research, meanwhile, noted that the relaxation would bring “more breathing space for some S-Reits with significant overseas operations, especially those that have faced a spike in borrowing costs in US dollars and suffered declines in their income due to operational headwinds”.
The relaxed requirements might also make the S-Reits more competitive in the pursuit of acquisitions, DBS said. The private real estate funds that Reits compete with for acquisitions tend to be able to gear up significantly.
This is a mixed benefit, DBS noted. In theory, the proposal “empowers the manager to add risk or leverage as the interest cycle turns”.
In reality, however, “the market has historically been discerning and priced S-Reits according to the through-cycle management of overall leverage ratios and financial management strategies”.
So, while the rules will help those Reits with low ICRs and/or high leverage, the unit price impact may be negligible.
OCBC suggested investors stick with those Reits that have healthy financial positions and are backed by strong sponsors.
The big number: 52%
That is how much the shares of pawnbroker Well Chip Group managed to rise on their first day of trading on Bursa Malaysia. They closed Friday (Jul 26) at RM1.72, 49.6 per cent above their IPO price of RM1.15.
Trinh Nguyen, senior economist for emerging Asia at Natixis CIB, called Malaysia “Asia’s comeback kid” as the country attracts more portfolio inflows and long-term capital.
I’ve written a fair bit about Malaysia’s stock market revival, but I think Well Chip’s successful debut is particularly noteworthy because its parent company is Singapore-listed pawnshop operator ValueMax Group.
If Well Chip continues to win over investors, ValueMax could join a list of Singapore-listed companies whose subsidiaries are more richly valued overseas.
After a recent column in which I suggested Singapore companies need to be more ambitious, one reader wrote in to point out that the likes of ValueMax are getting a better reception to that ambition overseas.
He’s right, of course. This is one discrepancy that is worth investigating further, I think. If you have ideas for the reasons, write to me at joanng@sph.com.sg
5 big reads
- Singapore stock market doesn’t need global champions, just big ambitions INSTITUTIONAL investors don’t only invest in global champions. The argument that the Singapore market needs better stocks may be true, but doesn’t fully explain the problem.
- Smaller boutique managers winning private capital with localised knowledge AS BIG managers get bigger, more opportunities emerge for boutique managers to distinguish themselves.
- NTUC Enterprise’s commitment to majority stake in Income is questioned THE cash general offer made by German insurance giant Allianz for Income Insurance has taken the general public and policyholders by surprise, and raised unhappiness in some quarters.
- Does Singapore have the stomach to back a local chip player? WITHOUT a national champion, the Republic’s semiconductor industry is dependent on foreign giants.
- S-Reits to hit ‘turning point’ in coming quarter amid expectations of interest rate cuts HOWEVER, S-Reits are likely to report lower year-on-year distributions in the upcoming earnings season as they continue to refinance maturing low cost of debt.
