Breaking Down The Relaxed Regulations on REITs in Singapore

In light of the challenges that real estate investment trusts (REITs) in Singapore are facing, the Monetary Authority of Singapore (MAS) has stepped in to relax the regulatory constraints for REITs. This is extremely timely and is welcome news for worried REIT investors.

In this article, I’ll summarise some of the key changes and what it means for REITs.

Extension of permissible time for REIT to distribute its taxable income.

REITs in Singapore are required to distribute at least 90% of their taxable income to unitholders to qualify for tax transparency treatment. Under the tax transparency treatment, a REIT is not taxed on its income that is distributed to unitholders.

Previously, REITs had to distribute this amount within 3 months of the end of its financial year. But MAS has now extended the deadline to 12 months for this financial year.

What does this mean for REITs?

This will give REITs a larger cash buffer for this difficult period, especially for REITs that intend to approve later collection of rents or provide rental rebates for their tenants. Such REITs will now have the cash buffer to pay off their expenses and interest payments first, while still supporting their tenants.

This is great news for REIT investors who may have been concerned that REITs who have cash flow issues will not be able to enjoy the tax benefits that REITs usually enjoy.

SPH REIT (SGX: SK6U) was the first REIT in Singapore to announce that it will retain a large chunk of its distributable income in its latest reporting quarter in anticipation that it will need the cash in the near future.

Higher leverage limit and deferral of interest coverage requirement

MAS has raised the leverage limit for REITs in Singapore from 45% to 50%. This gives REITs greater financial flexibility to manage their capital. Lenders will also be more willing to lend to REITs who were already close to the previous 45% regulatory ceiling.

MAS also announced that it will defer the implementation of a new minimum interest coverage ratio of 2.5 times to 2022.

What does this mean for REITs?

I believe that the pandemic could result in tenancy defaults. This, in turn, could result in lower net property income for some REITs in the near term, putting pressure on their interest coverage ratios.

The deferment of the minimum interest coverage ratio and the higher gearing limit will allow REITs to take on more debt to see them through this challenging period.

Investors who were concerned about REITs undertaking rights issues, in the process potentially diluting existing unitholders, can also breathe a sigh of relief. The increase in the gearing limit to 50% will enable REITs to raise capital through the debt markets rather than issuing new units at current depressed prices.

My take

The lightening of regulatory restrictions by MAS is good news for REITs. This is especially welcoming for REITs with gearing ratios that were already dangerously close to the 45% regulatory ceiling, such as ESR-REIT (SGX: J91U). It now can take on a bit more debt to see it through this tough period, without breaking MAS regulations.

At the same time, I would like to see REITs not abuse MAS’s new rules. They should still be prudent in the way they take on debt to expand their portfolio. Ideally, REITs that have expensive interest costs should be more careful about their debt load and not increase their debt beyond what they can handle.

I think this COVID-19 crisis is a great reminder for all REITs that they cannot take anything for granted and need to have safety measures in place to ride out similar challenges in the future.

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