MAS Announced New Measures To Help REITs Through This Challenging Period



The Monetary Authority of Singapore (MAS) released a press release on 16 April to help REITs navigating this challenging Covid-19 period. Summary of the new measures:

  • Extend timeline for S-REIT to qualify for tax transparency status

  • Lift the gearing limit to 50%


What does that mean


Extend timeline for S-REIT to qualify for tax transparency status

In order to be qualified for tax transparency status, REITs are regulated to pay out at least 90% of the distributable income to unitholders every 3 months. In other words, REITs are structured such that they maintain a low operating cash flow. This has been fine for S-REIT during the normal period, as the rental income is relatively stable and predictable. However, as almost all the industries are hit by the Covid-19 and the most recent Circuit Breaker, cash flow becomes one of the pressing issue for all the organisations including the REITs' tenants. In the coming months, there will be some challenges on collecting rents and the retention rate is likely drop.


In the press release, MAS announced that the period to obtain tax transparency status will be increased from 3 months to 12 months. This extension is very welcomed by the industry especially the retail and hospitality REITs. It allows the REITs to conserve more cash for operating purposes as well as helping the tenants during this difficult period.


However, in the near term, there will be a downside for the investors as the distributable income is likely be negatively impacted.


Lift the gearing limit to 50%

With the immediate effect, the gearing ratio will be lifted to 50% from the previous 45%. This will give the REITs more headroom and flexibility to manage their capital structure. The additional debt headroom will also give the REITs more power on merger and acquisitions. However, we think that there is minimal appetite from the investors for such activities during this period.


Besides, the implementation of interest coverage requirement of 2.5 times will be delayed. However, even if the measure is implemented, the impact on S-REITs should be minimal. Based on the previous quarter performance, all REITs maintained an interest coverage ratio of above 2.5 times. The 5 REITs with lowest interest coverage ratio are:

  1. Dasin Retail Trust - 1.8 times

  2. Suntec REITs - 2.9 times

  3. OUE Commercial REIT - 3.1 times

  4. Soilbuild Business Space REIT - 3.4 times

  5. Far East Hospitality Trust - 3.4 times


S-REITs' Gearing and Interest Coverage Ratio

Summary


The MAS announcement is in general welcomed by the industry. In terms of the interest coverage ratio, Industry REITs remain as one of the strongest sector.


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