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Good buys for Reits harder to come by with lower debt limits

Yield-accretive acquisitions tougher as equity financing is more expensive and erodes returns

THE recently enforced lower debt limit for real estate investment trusts (Reits) is making it harder for Reits to do yield-accretive acquisitions.

It is a chain effect.

Singapore Reits had taken advantage of the low interest rates last year to make acquisitions funded mostly by debt. This had caused many of their gearing levels to creep up.

At the start of this year when the new leverage limit of 45 per cent kicked in (down from 60 per cent for credit-rated Reits), managers are now cautious about borrowing more.

In wanting to provide some buffer, many have also set an internal leverage cap of 40 per cent. This leads them to fund new acquisitions with equity financing instead, which is more expensive...

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