MAS rationalises leverage requirements and introduces additional disclosures for REITs

6 December 2024

On 28 November 2024, the Monetary Authority of Singapore (“MAS”) issued an updated version of the Code on Collective Investment Schemes (“Code”) to rationalise leverage requirements for the real estate investment trust (“REIT”) sector.

Background

MAS published a consultation paper on 24 July 2024 seeking feedback on proposed amendments to the leverage requirements for REITs. On 28 November 2024, MAS published its response to the feedback received (“Response”), noting the broad support received for the changes across respondents of various categories.

Minimum ICR threshold of 1.5 times and single aggregate leverage limit of 50% for all REITs

To rationalise the leverage requirements, the revised Code subjects all REITs to a minimum interest coverage ratio (“ICR”) threshold of 1.5 times and a single aggregate leverage limit of 50%. The changes took effect on 28 November 2024. The previous requirement was that a minimum ICR of 2.5 times was imposed only on REITs which intended to increase their aggregate leverage from 45% to 50%.

The revised Code streamlines the previous two definitions of ICR (i.e. “ICR” and “Adjusted-ICR”) into one. In the Response, MAS clarified that the ICR for the purposes of comparing against the threshold of 1.5 times is calculated by dividing the trailing 12 months’ earnings before interest, tax, depreciation, and amortisation (excluding effects of any fair value changes of derivatives and investment properties, and foreign exchange translation), by the trailing 12 months’ interest expense, borrowing-related fees, and distributions on hybrid securities.

MAS states that the ICR and leverage requirements will work together to foster prudent borrowing by all REITs while offering operational flexibility. Maintaining a minimum ICR of 1.5 times at all times underscores the responsibility of REIT managers in ensuring that REITs can adequately meet all interest payments, complemented by a leverage limit of 50%.

Additional disclosures concerning outlook and management of leverage and ICR levels

To enhance accountability in REITs’ financial management, REITs will be required to provide additional disclosures concerning the outlook and management of their leverage and ICR levels in their financial result announcements and annual reports. The following stepped-up disclosures will apply from financial periods ending on or after 31 March 2025 onwards:

  • REIT managers should disclose how they intend to manage REITs’ leverage and ICR levels in the REIT’s interim and full-year financial results announcements, and annual reports for any financial period ending on or after 31 March 2025.
  • REITs should also perform and disclose sensitivity analyses on the impact of changes in EBITDA and interest rates on REITs’ ICRs. The sensitivity analyses should minimally include two separate scenarios, one based on a 10% decrease in EBITDA and another based on a 100-basis point increase in interest rates. In the Response, MAS clarified that loans with fixed interest rates or hedged against fixed rates should not be excluded from the sensitivity analyses as such exclusions would underestimate the impact of movements in interest rates, particularly if the fixed-rate loans or their hedges are nearing maturity. The sensitivity analyses should be based on the weighted average interest cost of each REIT.
  • Where the ICR of a REIT has fallen below 1.8 times, the REIT manager should take steps and/or have plans in place to improve the REIT’s ICR, and disclose this additional information in the REIT’s interim and full-year financial results announcements, and annual reports for any financial period ending on or after 31 March 2025.

Reference materials

The following materials are available on the MAS website www.mas.gov.sg: