Risks to intensify for some SREITs under new MAS rules: Fitch

The sector will have higher leverage and earnings volatility.

The Monetary Authority of Singapore's (MAS) proposed amendments to regulations governing real estate investment trusts listed in Singapore (SREITs) has been generally heralded as a positive move. 

The changes aim strengthen corporate governance, align incentives of SREIT managers with unit-holder's interests, tighten the structure of income support contracts and the rules on SREITs that are operating as stapled groups, and enhance the transparency and disclosure requirements of the industry.as will be positive for the industry overall.

However, Fitch points out that the proposal can put some REITs at risk. For instance, the proposal to allow SREITs to increase their exposure to development risk to 25% of total asset value, from 10% at present, will increase the earnings volatility of SREITs that choose to do so.

The additional 15% of total asset value is to be used solely for refurbishment of existing properties and not for investing in new developments. The current 10% limit on development risks covers both refurbishment and investments in new projects.

This proposed change will give SREITs more flexibility to renew their assets rather than sell the property to their sponsors to redevelop and subsequently buy back the redeveloped property. It will also potentially increase the amount of funds the SREITs can allocate to new developments, which could add to unitholder value.

The proposal to introduce a single-tier leverage cap of 45% without the need for a credit rating could also increase risks to the sector as a whole. This effectively encourages SREITs to increase leverage as it reduces the costs of doing so.

At present, SREITs can leverage only up to 35% without obtaining a credit rating. SREITs that are not rated account for about a third of the industry.