MAS Latest Changes For REITs: 50% Leverage and 1.5 times ICR (which includes Hybrid Securities Distribution)

The latest MAS rules for REITs is simple and helps to ease some of the pressure on leverage.

Summary

Basically, MAS has simplified the limits and can be understood simply as:

(i) REIT leverage should not exceed 50%;

(ii) Interest Coverage Ratio, ICR, (including distribution from hybrid securities) should not be lower than 1.5 times, a decrease from the previous 2.5 times. And sensitivity analysis to be reported under situations of drop in property income or interest rate rises

My Thoughts

These changes help investors understand the regime much better because previously there was a 45% leverage limit and a 50% leverage limit with an "if" condition. Everything is now simplified and even for what is defined under the ICR, it is clear. No more wriggling their way out (for the Mapletree REITs).

Higher Leverage Limit

It is definite good news for all REITs since their regulated leverage limit has been raised and it is now cap at 50%. Suntec REIT is a definite beneficiary as they were hovering near the 45% limit and had a very low interest coverage ratio.

The US REITs are another group of beneficiary with 2 out of the 3 REITs having exceeded the 45% leverage limit and walking on thin ice for their ICR. It is worth noting for both PRIME and Manulife (MUST), their ICR are at 2 times range but due to their revaluation of properties they were close to breaching/have breached the regulatory limit for leverage. So in a way, the new rules help ease pressure off and for MUST it gives a boost to their deleveraging strategy.

Market Movements

While there was not much price movement in the REITs space post the news on 29 November 2024, I do take the news as a positive. With a higher and clearer definition of leverage, it gives assurance to the distribution of REITs (of course the distribution of REITs will still be affected by the property income, which affects ICR too). 

This is a plus and I will evaluate increasing my portfolio to REITs knowing there is a less stringent regulatory limit in place giving more headroom for (i) troubled REITs to breathe and in turn resume dividend or (ii) REITs with stronger balance sheet can now take on more AEI or smaller buildings to increase income.