Singapore simplifies REIT leverage rules for growth flexibility

New leverage requirements align Singapore REITs with APAC markets.

The Monetary Authority of Singapore (MAS) has proposed a minimum interest coverage ratio (ICR) of 1.5 times and a simplified aggregate leverage limit of 50% for all Singapore REITs (S-REITs). Currently, the 2.5 times ICR only applies to S-REITs seeking to increase their leverage from 45% to 50%.

Wong Xian Yang, Head of Research Singapore and Southeast Asia at Cushman & Wakefield, noted that the proposed changes aim to simplify the leverage requirements while maintaining financial discipline within the sector. 

Wong emphasised that this move will also help align Singapore with other major REIT markets in the Asia Pacific region, such as Japan, Australia, and Hong Kong, where similar leverage limits do not exist or are more relaxed. "Relaxing the leverage requirements also aligns Singapore with other REIT markets in Asia Pacific and allows it to be more competitive," Wong said.

The current average gearing for Singapore REITs is approximately 39%, which is below the existing leverage limit. Wong highlighted that the proposed relaxation should ultimately lead to higher gearing levels, enabling REITs to pursue more growth opportunities. 

With the proposed ICR requirement, Wong advised that REITs prepare by conducting and disclosing sensitivity analyses on the impact of changes in earnings and interest rates on their ICR. "MAS has proposed that REITs conduct and disclose sensitivity analysis on the impact of changes for earnings and interest rates on the ICR, and this should be communicated clearly to investors during the financial reporting," he mentioned.

Despite the upcoming changes, Wong believes that Singapore REITs are well-positioned to adapt and thrive. He also noted that the average ICR for S-REITs is currently above three times, which indicates a strong financial footing for the sector.

"In general, I think the proposed changes is a positive step for Singapore REITs, and will allow them to grow asset talent management. They also have more flexibility in a capital structure and will be more competitive with the other REIT markets in the region," Wong concluded.