MAS releases consultation paper to review policy on Reits

The Monetary Authority of Singapore has recently release a consultation paper to review various policies with regards to S-REITs. Other than policy review that touches on the statutory duty of the REIT manager and its directors to prioritize the interests of REIT investors over those of the REIT manager and its shareholders in the event of a conflict of interest, following are other major changes proposed:

Gearing Limit of 45% of Assets 

Currently the gearing limit of the REITs is 35% without credit rating and 60% with credit rating (see All About REIT - The Basics Part 4: Gearing Limit). MAS has proposed a single gearing limit of 45 per cent whether it is with or without credit rating. There will no longer be a separate 60% gearing limit with credit rating. Currently most of the REITs have a gearing of around 30 to 40%. Based on past history, when a REIT reaches a gearing close to or above 40%, it will go by the way of rights issue if it requires funding for acquisition. Very seldom do we see REITs reaching a gearing limit above 50%.

Development limit to be raised to 25%
Development limit for a REIT will be raised to 25 per cent of its deposited property. Currently the limit is set at 10% (see All about REIT - REIT as a Property Developer). To date I think only Ascendas Reit and CapitaMall Trust have ever been involved in property development activities. Their asset values are the highest among the REITs, while for the smaller REITs the 10% will be too low for them to be engaged in property development activities. Raising this limit to 25% might bring about the tipping point for some REITs to engage in development projects as alternative stream of income on top of the rental income.

The consultation paper will be open for comments till 10 November 2014.