Singapore Reits get new leverage caps and tighter disclosure requirements from MAS

Singapore has announced changes to the level of interest cover and debt for its listed real estate investment trusts (Reits), as well as tighter disclosure rules.

The move gives investors more protection, while encouraging Reits to borrow prudently without hampering their ability to do so.

The Monetary Authority of Singapore (MAS) said on Nov 28 it will impose a minimum interest coverage ratio (ICR) of 1.5 times on all Reits.

The ICR is a measure of how well a company can repay the interest on its debt.

MAS also said a single aggregate leverage limit of 50 per cent will be applied to all Reits.

The aggregate leverage refers to the ratio of a Reit’s total debt to total assets. It indicates a company’s ability to take on more debt.

Previously, only Reits that intended to increase their aggregate leverage from 45 per cent to 50 per cent had to comply with a minimum ICR of 2.5 times.

“The interest coverage ratio and leverage requirements will work together to foster prudent borrowing by all Reits while offering operational flexibility,” said MAS.

It added: “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 per cent that is among the strictest globally.”

The new rules, which take effect immediately, follow a public consultation held by MAS in July and August 2024.

Interest coverage ratios of Singapore Reits have generally declined over the past year, primarily due to rising interest expenses driven by the elevated interest rate environment, said Securities Investors Association (Singapore) president David Gerald. 

At the same time, property income growth has been relatively subdued amid ongoing economic uncertainties, contributing to the pressure on interest coverage ratios, he added. 

And while interest rates are expected to have peaked, with the US Federal Reserve having begun cutting them, there are concerns now this may slow or even reverse if the incoming Trump administration slaps hefty tariffs on imports, refuelling US inflation.

MAS said the changes received broad support from industry practitioners, a professional body and individuals.

Corporate governance expert Lawrence Loh said the new requirements offer the best of both worlds – they ensure the Reits promote financial prudence while still being able to thrive in a dynamic market environment.

“In the expected lower interest rate setting, we need to guard against excessive borrowing while balancing the risk appetite of Reits to seek growth through capital expansion,” said Professor Loh, director of the centre for governance and sustainability at NUS.

Reits will also need to provide additional disclosures on how they will manage their leverage and coverage ratio levels, as well as the outlook of these levels. This is aimed at enhancing the accountability in Reits’ financial management, MAS said.

The stepped up disclosures will apply from financial periods ending on or after March 31, 2025.

Under these additional rules, Reit managers should do analyses on how changes in their earnings and interest rates can affect their ICR levels, and disclose these studies.

MAS specified that these analyses should include one scenario based on a 10 per cent drop in earnings, and another based on a 100 basis point increase in interest rates.

In the event that a Reit’s ICR falls below 1.8 times, the Reit manager should also disclose the steps or plans they have in place to improve the ratio, MAS said.

Prof Loh added: “The new provisions are an effective step in continuing the emphasis on investor protection.

“Investors naturally seek financial returns, but they cannot be exposed to undue risks of Reits if the borrowings are unmoderated.”

Mr Gerald added that for Reit investors, the enhanced disclosure requirements will provide valuable insights into the financial health of the Reits. 

“This increased transparency will empower investors to make more informed investment decisions,” he said. 

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