The Monetary Authority of Singapore (MAS) have given Real Estate Investment Trust (REIT) managers wider borrowing limits, as MAS cleared how the property’s downward revaluations should be treated.
MAS said that there is no need for REITs to worry if there is an increase in their leverage due to the revaluation of properties, which cost less at this time.
Under the Property Fund Guidelines of MAS, the deferred payments and total borrowings of S-REITs should not be over 35 percent of their deposited property. This maximum limit can reach up to 60 percent if a credit rating is obtained by the REIT and have it publicised.
In a circular for REIT trustees and managers this month, it was confirmed by MAS that if the total leverage increased due to the decline in property values, it will not sum up to leverage limits breach. MAS also pointed out that a REIT’s refinancing of an existing debt is not to be interpreted as obtaining additional borrowings.
“So if at the point of refinancing, a REIT has to revalue its assets (which lenders will require), and so long as the refinancing is of existing debt, MAS will not consider this as additional borrowing and hence the REIT will not be in breach of the statutory leverage limit,” Giam Lay Hoon, Oxley Capital Group’s group general counsel, said.
MAS also stated that it will give REITs the permission to raise debt for different purposes of refinancing prior to the actual debt maturity that needs refinancing, without including funds acquired in the limit of aggregate leverage. However, this plan is “provided that the funds are set aside solely for the purpose of repaying the maturing debt”.
“The trustee must place these funds in a separate trust account which shall be drawn on only to repay the maturing debt,” MAS stated in the circular.
Miss Giam of Oxley Capital welcomed the responsiveness of MAS to the tighter conditions of the credit market. The REIT manager’s CFO told the Business Times that the clarification of MAS would “give some breathing space for some REIT managers with high gearing and with properties in danger of being substantially depreciated”.
He said this would lessen the pressure on REITs to recapitalise by raising new equity and ease the pressure on these REITs’ unit price.
“However, ratings agencies will continue to be nervous about property depreciation as that may reflect sliding rents and occupancies and a rise in tenant-default rates,” the CFO added.
Stan Ho, senior director of Fitch Ratings and head of structured finance Non-Japan Asia, pointed out that “any downward revaluation of the underlying property would raise the loan-to-valuation ratios as far as banks lending to REITs are concerned, and this would need to be considered in our ratings for Singapore REITs”.
Moody’s Singapore’s vice-president Kathleen Lee also stressed, “Lenders to REITs can set their own covenants and a downward revaluation could trigger a breach of some of these covenants and that could also lead to a re-rating of the REIT,” while there is a downward revaluation which may not breach the statutory limit of MAS’s aggregate leverage for S-REITs.