Singapore REITs - Single leverage limit positive for sector

Singapore REITs subject to single leverage limit

The Monetary Authority of Singapore (MAS) announced that all Singapore-listed REITs will be subject to the following:

• A single leverage limit at 50% for all REITs
• All REITs must meet a minimum interest coverage ratio (ICR) of 1.5 times at all times. If this is breached, the REIT should not incur additional borrowings or enter into further deferred payment arrangements. However, it can continue to refinance existing borrowing

REITs are required to perform and disclose sensitivity analyses on the impact of changes in EBITDA and interest rates on REITs’ interest coverage ratio.  

Where the interest coverage ratio of a REIT has fallen below 1.8 times, the REIT manager should take steps to improve the REIT’s interest coverage ratio, and disclose this additional information. 

This disclosure is to be made at the interim financial results and annual reports starting from the financial periods ending on or after 31 March 2025. 

The changes follow a public consultation held by the MAS in July and August this year.

Previously, S-REITs can borrow up to 50% of the value of its assets. The limit drops to 45% if the adjusted interest coverage ratio (ICR) falls below 2.5 times.

What is interest coverage ratio?

The interest coverage ratio (ICR) measures the REIT’s ability to service its debt.

It is the ratio of operating income over the sum of interest expense and dividend on perpetual securities.

A REIT with a low operating income in proportion to its interest expense would have a low interest coverage ratio, and would be seen to have a lower ability to service its debt.

On the other hand, a REIT with a high operating income in proportion to its interest expense would have a higher interest coverage ratio, and would be in a better position to service its debt.

The interest coverage ratios of Singapore REITs have generally fallen in the past year as income growth have not caught up with rising interest expense.

What would Beansprout do?

In our view, the announced changes are positive for the REIT sector. 

The lower interest coverage ratio limit would provide breathing space when revenue is impacted when the asset undergoes AEI or redevelopment, or when there is a transition in tenancy. 

It also gives room for REITs to fund growth through debt, which is currently a cheaper option compared to equity. 

These changes will be especially helpful for REITs with ICR of between 1.5-2.5x, which may now have more debt headroom.

REITs with an interest coverage ratio close to or below 2.5x include Lippo Mall Trust, Lendlease REIT, BHG Retail REIT, Suntec REIT, Acrophyte Hospitality Trust, Manulife US REIT, OUE REIT, AIMS APAC REIT, Prime US REIT and United Hampshire US REIT. 

Related Links:

• OUE REIT - Underrated growth potential 

• AIMS APAC REIT - Asset repositioning gives it an edge

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