Singapore REITs - DBS Research 2019-07-03: MAS Mulls Higher Gearing Limits

Singapore REITs - DBS Group Research | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Singapore REITs - MAS Mulls Higher Gearing Limits

  • MAS seeks comments on potential changes in gearing limits and additional safeguards.
  • Potential option to increase gearing to 50-55%, from 45% with minimum interest rate coverage ratio.
  • Proposals potentially provide sufficient safeguards to ensure S-REITs use higher debt levels judiciously.



What’s New - Potential changes to S-REITS leverage limits

  • The Monetary Authority of Singapore (MAS) has just released a consultation paper to review the 45% gearing limit for S-REITs.
  • It is seeking feedback on whether the use of interest coverage ratio with a leverage limit is appropriate or if there are any other approaches or credit metrics to determine the amount of leverage. See the publication.
  • In addition, it is asking for comments on the following options:
    • 50% gearing limit subject to a minimum interest coverage ratio (ICR) of 2.5 times after taking into account the interest payments arising from the new debt,
    • 55% gearing limit but having a higher ICR threshold.
  • These questions that MAS is seeking to address arose from industry feedback that a higher leverage limit is required to give S-REITs more flexibility. This is important as REITs acquire overseas assets from third parties and face competition from private equity funds and/or developers which have higher gearing limits. Given the highly time sensitive nature of such acquisitions, REITs are hampered by the time taken should they need to rely on raising equity rather than funding with debt.
  • Furthermore, MAS is looking for views on whether S-REITs should disclose their leverage ratios and interim coverage ratios in interim financial results and annual reports, as well as the definition of interest coverage ratio as EBITDA (excluding effects of any fair value changes) divided by interest expense.


Our Thoughts

  • While investors may feel uncomfortable with higher gearing, we believe having a minimum ICR may provide sufficient safeguards.
  • In addition, with S-REITs progressively expanding overseas, taking additional local (non-SGD) debt as a natural hedge would be a prudent risk-mitigating strategy.
  • Even if the leverage limit is lifted to 50-55%, we believe most S-REITs will not increase their gearing to such a level but use the higher debt headroom for opportunistic acquisitions or developments.
  • While a higher gearing may be a “double edge sword”, given most S-REITs and their Sponsor’s are experienced property managers, we believe they would be aware of the dangers of gearing up in the later stages of the economic or property cycle.
  • Finally, the market would keep the REITs in check should they “misuse” this extra debt headroom.
  • As such, we believe the increase in gearing limit, if it happens, would bode well for the overall sector and would help S-REITs fund value accretive acquisitions.


Interest coverage ratio and gearing as disclosed by selected S-REITs as at 31 March 2019

REIT Interest Cover (x)* Gearing (%)
AIMS APAC REIT (SGX:O5RU) 5.0 33.7
ASCENDAS HOSPITALITY TRUST (SGX:Q1P) 12.7 33.2
ASCENDAS INDIA TRUST (SGX:CY6U) 4.0 31.0
ASCENDAS REIT (SGX:A17U) 5.2 36.3
ASCOTT RESIDENCE TRUST (SGX:A68U) 4.5 35.7
CDL HOSPITALITY TRUSTS (SGX:J85) 5.8 35.2
CACHE LOGISTICS TRUST (SGX:K2LU) 4.3 37.4
ESR-REIT (SGX:J91U) 3.7 42.0
CAPITALAND COMMERCIAL TRUST (SGX:C61U) 5.8 35.2
CAPITALAND RETAIL CHINA TRUST (SGX:AU8U) 5.0 35.5
CAPITALAND MALL TRUST (SGX:C38U) 4.9 34.4
FAR EAST HOSPITALITY TRUST (SGX:Q5T) n/a 39.9
FRASERS CENTREPOINT TRUST (SGX:J69U) 6.0 28.8
FRASERS COMMERCIAL TRUST (SGX:ND8U) 4.7 29.1
FRASERS HOSPITALITY TRUST (SGX:ACV) 4.8 34.1
FRASERS LOGISTICS & IND TRUST (SGX:BUOU) 7.5 35.1
IREIT GLOBAL (SGX:UD1U) 10.0 38.0
CROMWELL EUROPEAN REIT (SGX:CNNU) 9.2 37.0
KEPPEL DC REIT (SGX:AJBU) 12.9 32.5
KEPPEL REIT (SGX:K71U) 4.1 35.7
MANULIFE US REIT (SGX:BTOU) 3.9 37.6
MAPLETREE COMMERCIAL TRUST (SGX:N2IU) 4.5 33.1
MAPLETREE NORTH ASIA COMMERCIAL TRUST (SGX:RW0U) 4.2 36.6
MAPLETREE INDUSTRIAL TRUST (SGX:ME8U) 6.5 33.8
MAPLETREE LOGISTICS TRUST (SGX:M44U) 4.9 37.7
OUE COMMERCIAL REIT (SGX:TS0U) 3.3 39.4
OUE HOSPITALITY TRUST (SGX:SK7) 4.3 38.4
PARKWAYLIFE REIT (SGX:C2PU) 13.2 36.4
SABANA SHARIAH COMPLIANT REIT (SGX:M1GU) 3.9 39.3
SPH REIT (SGX:SK6U) n/a 30.1
STARHILL GLOBAL REIT (SGX:P40U) 3.8 35.7
SUNTEC REAL ESTATE INV TRUST (SGX:T82U) 2.9 38.6
* The calculation of ICR by individual S-REITS may differ to MAS’s proposed definition of ICR
Source: Various S-REITs, DBS Bank





Mervin SONG CFA DBS Group Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2019-07-03
SGX Stock Analyst Report BUY MAINTAIN BUY 3.200 SAME 3.200



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