S-REITs offered new measures to navigate Covid-19 operating challenges

The Ministry of Finance (MOF), the Inland Revenue Authority of Singapore (IRAS), and the Monetary Authority of Singapore (MAS) on April 16 announced new measures to provide real estate investment trusts listed on the Singapore Exchange (S-REITs) with greater flexibility to manage their cash flows and raise funds amid a challenging operating environment due to COVID-19. These comprise an extension of the deadline for distribution of taxable income by MOF and IRAS, and a raising of the leverage limit and deferment of new regulatory requirements by MAS.

Extension of Permissable Period for Distribution of Taxable Income for S-REITs

MOF and IRAS will extend the timeline for S-REITs to distribute at least 90% of their taxable income from 3 months to 12 months (after the end of Financial Year (FY) 2020) to qualify for tax transparency. Under the tax transparency treatment, an S-REIT is not taxed on its income that is distributed to its unitholders.

This extension is only applicable for distributions made from taxable income that is derived by an S-REIT during FY2020. For example, to avail to the tax transparency treatment for FY2020 taxable income, S-REITs with FY2020 ending 31 March 2020 and 31 December 2020 will have up to 31 March 2021 and 31 December 2021 respectively, to distribute to their unitholders at least 90% of their taxable income derived in FY2020.

The extension will give S-REITs more flexibility to manage their cash flows. As S-REITs typically distribute the bulk of their income to unitholders, they tend to hold lower cash reserves.

IRAS will provide further details of the change by early May 2020.

Higher Leverage Limit and Deferral of Interest Coverage Requirement for S-REITs

MAS will raise with immediate effect the leverage limit for S-REITS from 45% to 50%, to provide S-REITs greater flexibility to manage their capital structure and to raise debt financing amid the challenging environment created by the COVID-19 pandemic.

MAS will defer to 1 January 2022 the implementation of a new minimum interest coverage ratio (ICR) requirement. In its public consultation last year. On 2 July 2019, MAS issued the Consultation Paper on Proposed Amendments to the Requirements for REITs. MAS said it will release a detailed response to the Consultation Paper in due course.

MAS had proposed to require S-REITs to have a minimum ICR of 2.5 times before they are allowed to increase their leverage to beyond the prevailing 45% limit (up to 50%). The implementation of the ICR requirement will now be deferred as S-REITs’ ICRs are likely to come under pressure in the near term due to the negative impact of the COVID-19 pandemic on their earnings and cashflows.

The higher leverage limit, together with the enhanced share issue limit announced by SGX RegCo last week, will allow S-REITs to have continued access to different funding channels, including borrowing from banks, issuing bonds, and raising equity. On 8 April 2020, SGX RegCo announced that it would provisionally enable Mainboard issuers to seek a general mandate for an issue of pro-rata shares and convertible securities of up to 100% of its share capital (excluding treasury shares and subsidiary holdings in each class) versus 50% previously. This is one of the measures that SGX RegCo has, in consultation with MAS, introduced to support listed issuers amid COVID-19. Please refer to SGX RegCo’s Press Release at this link for more information.

To provide investors with timely information about the financial position of S-REITs and the impact of higher leverage on their risk profiles, MAS will require S-REITs to disclose their leverage ratios and ICRs in annual reports and interim financial results.

Notwithstanding the higher leverage limit, MAS expects S-REIT managers to carefully assess their ability to service financial obligations before taking on additional debt.

Just in December 2018, a report by Nikkei Asian Review said that Singapore-listed real estate investment trusts (S-REIT) are emerging as safe havens for equity investors due to their low debt levels and steady cash flow. The report said that he Singapore REIT sector is viewed favourably by such investors especially as market uncertainties increases as it allows them to maintain their relatively high dividends.

A real estate investment trust (REIT) is a company that owns, and in most cases operates, income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels and timberlands. Some REITs engage in financing real estate.

Singapore is the second best prospect in the Asia Pacific for real estate investments

REITs can be publicly traded on major exchanges, public but non-listed, or private. The two main types of REITs are equity REITs and mortgage REITs (mREITs). In November 2014, equity REITs were recognized as a distinct asset class in the Global Industry Classification Standard by S&P Dow Jones Indices and MSCI. The key statistics to examine the financial position and operation of a REIT are net asset value (NAV), funds from operations (FFO), and adjusted funds from operations (AFFO).

There are 31 REITs listed on the Singapore Exchange, with the latest REIT, Cromwell European REIT, listed on 30 November 2017. The first one to be set up being CapitaMall Trust in July 2002.

They represent a range of property sectors including retail, office, industrial, hospitality and residential. S-REITs hold a variety of properties in countries including Japan, China, Indonesia and Hong Kong, in addition to local properties. In recent years, foreign assets listing on the Singapore Exchange has grown to overtake those traditional listing with local assets.

S-REIT are regulated as Collective Investment Schemes under the Monetary Authority of Singapore’s Code on Collective Investment Schemes, or alternatively as Business Trusts.

Some of the regulations that S-REITs have to adhere to includes:

• Maximum gearing ratio of 35%
• Annual valuation of its properties
• Restriction to certain types of investments the S-REITs can make
• Distribution of at least 90% of its taxable income

S-REITs benefit from tax advantaged status where the tax is payable only at the investor level and not at the REITs level. In addition to REITs, there are ten Business Trusts (“BTs”) (similar to REITs but may hold assets that are not conventional and are not subjected to stringent rules as compared to SREITs), and six Stapled Instruments (composed of a stapled Business Trust Unit and a REIT unit), which are listed on the Singapore Exchange. The total market capitalisation of the listed Trust on Singapore Exchange approximate SGD 100 billion (as at 30 Nov 17).

The majority of the returns by S-REITs have been in the negative territory in 2018. Market observers say the increase in interest rate has some bearings on this outcome, but considering the fact that majority of the global markets have experienced a dip in 2018, this should not be the only factor to keep savvy investors away from investing in this asset class.

image credit: Wikimedia Commons

The online publication Dollars and Sense said in their recent report card on S-REIT that the best performing S-REIT in YTD 2018 is CapitaLand Mall Trust.

It said: “While retail REITs have not been in favour due to burgeoning e-commerce in recent years, the ongoing US-China trade war has taken some of the shine off other REIT types such as industrial, logistics and offices. Other REITs that posted a good return includes retail focused Dasin Retail Trust (6.0%) and Mapletree Commercial Trust (5.0%), as well as Sabana REIT (5.4%) and IREIT (4.2%).”