This article was originally published in BDO Spotlight - January 2025
On 28 November 2024, the Monetary Authority of Singapore (MAS) issued an updated version of the Code on Collective Investment Scheme (“Code”) to rationalise leverage requirements for the real estate investment trust (REIT) sector.
Minimum ICR Threshold of 1.5 times and Single Aggregate Leverage Limit of 50% for All REITs
This update comes on the back of a public consultation held in July 2024 seeking feedback on proposed amendments to simplify the leverage requirements. Under the revised framework, all REITS are now subject to a minimum interest coverage ratio (ICR) threshold of 1.5 times and an aggregate leverage limit of 50%. The previous requirement was that a minimum ICR of 2.5 times was required if a REIT intends to increase its aggregate leverage from 45% to 50%. The proposed changes, which received broad support from industry practitioners, a professional body, and individuals, took effect immediately on 28 November 2024.
MAS stated that the ICR and leverage requirements will work together to foster prudent borrowing by all REITs while offering operational flexibility. Maintaining a minimum ICR of 1.5 times at all times underscores the responsibility of REIT managers in ensuring that REITs can adequately meet all interest payments, complemented by a leverage limit of 50%.1
Challenges and Competitive Pressures Facing Singapore’s REIT Industry
In recent years, Singapore is frequently regarded as Asia’s premier global REIT platform. However, comparing September 2021 to September 2024, Singapore has seen a decrease in the number of listed REITs and property trusts by 1 but a significant decline in overall market capitalisation of approximately 10%.2 This decline in market capitalisation aligns with global REIT market trends and is primarily attributed to the high interest rate environment, which has significantly elevated the cost of debt refinancing. Additionally, heightened competition for capital with yield-focused alternatives, such as fixed deposits and government bonds, has further intensified pressure on the REIT sector.3
On a regulatory front, no ICR and leverage limits are currently imposed in more mature REIT jurisdictions, such as Japan, Australia and the US. Singapore REITs, therefore, have to compete not only with REITs overseas but also with other global real estate investors and companies which are also not subject to regulatory leverage limits. The requirement for Singapore REITs to maintain their aggregate leverage at 50% or less hampers their ability to compete effectively against global competitors. Though MAS’ regulatory changes on leverage requirements are positive, a more flexible regulatory framework can better enhance the resilience of Singapore’s REIT industry, compared with a one-size-fits-all regulatory leverage limit.
Additional Disclosures Concerning Outlook and Management of Leverage and ICR Levels
To enhance accountability in REITs’ financial management, REITs will be required to provide additional disclosures concerning the outlook and management of their leverage and ICR levels in their financial result announcements and annual reports. The following enhanced disclosures will apply to financial periods ending on or after 31 March 2025:1
- REIT managers should generally disclose how they intend to manage the REITs’ leverage and ICR levels.
- REITs should perform and disclose sensitivity analyses on the impact of changes in EBITDA and interest rates on their ICRs. The sensitivity analyses should minimally include two separate scenarios: one based on a 10% decrease in EBITDA and another based on a 100-basis point increase in interest rates.
- Where the ICR of a REIT has fallen below 1.8 times, the REIT manager should implement measures or have plans in place to improve the REIT’s ICR, and disclose this additional information.
These enhanced disclosure requirements aim to empower investors to make more informed investment decisions by providing better insight into how market conditions could affect the financial health of the REITs.
Summary
Overall, the new regulatory changes introduced by MAS represent a strategic move to support the S-REIT sector amid challenging economic conditions. While most S-REITs are already operating comfortably within the previous limits, the revised requirements provide an opportunity for further growth and resilience. Together, the regulatory changes continue to prioritise investor protection and education, reinforcing the robustness of the sector.
References
1 “MAS Rationalises Leverage Requirements and Introduces Additional Disclosures for REITs”: MAS Rationalises Leverage Requirements and Introduces Additional Disclosures for REITs
2 SGX: www.sgx.com.sg
3 Winds of change for S-Reits as interest rates normalise: https://www.businesstimes.com.sg/wealth/winds-change-s-reits-interest-rates-normalise