REITs With Offshore Office

Singapore REITs With Offshore Office Assets Hit By Triple Whammy

SINGAPORE – An expert stated that Singapore-listed real estate investment trusts (S-REITs) with office properties in foreign countries like the United States have suffered a “triple whammy” in the form of evolved demand by office tenants, occupants’ preference for eco-friendly workspaces, and the impracticality of selling office buildings currently, reported The Business Times on Tuesday morning (19 September, SGT).

“Tenants now want smaller [office] spaces and are moving away from workstations to common areas,” explained Tan Boon Gin, the CEO of Singapore Exchange Regulation, an independent regulatory subsidiary of the local bourse.

Office landlords “may also need to green their buildings,” but reconfiguring office properties and making them eco-friendly to meet the new preference of tenants are both capex intensive, he explained during a fireside chat at the REIT Association of Singapore conference in August.

S-REITs with overseas office properties could also divest assets or increase equity to raise money in order to meet the mandatory aggregate leverage ratios of REITs. However, both options are not feasible at a time when unit prices have declined sharply and market conditions are not conducive for property sales.

Furthermore, Tan noted that borrowing funds – even from a REIT’s sponsor – could also negatively affect the interest coverage ratio (ICR) and the mandatory leverage limits.

As such, he suggested for the authorities to waive the rules on leverage limits for S-REITs if the goal of borrowing is for asset enhancement initiatives (AEI), which would increase property valuations and income.

“This will lead to deleveraging in the long term even if there is an increase in gearing in the short term,” he elucidated, adding that rule change should have to be reviewed carefully.

However, the Asia Pacific Real Assets Association’s (APREA) CEO Sigrid Zialcita thinks that any revisions to regulatory gearing limits are unlikely to happen.

“Regulators are likely to resist setting a precedent that could introduce higher risk to an asset class that is first and foremost a yield instrument predicated on stable and regular payouts, without further contemplation,” she noted.

She explained that mandatory leverage limits are already at a flexible level for S-REITs to deliver a steady growing distribution and generate sustainable profits.

Under the current rules, S-REITs must not have aggregate leverage surpassing 45 percent of the funds’ deposited property. The trust may exceed this threshold up to 50 percent if it has an ICR of at least 2.5 times.

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