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QuestionsCategory: Financials QuadrantREIT's High Leverage
Alex Tan asked 6 years ago

Hi,
I notice that generally REITs are highly leverage in nature. Hence, they have huge finance cost which is substantial as compared to net property income.
How do you see this as a risk to REITs?

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Alex Tan replied 6 years ago

Also, I hope that you can shed some light on the regulations of REITs.

1 Answers
Rusmin Ang answered 6 years ago

Hi Alex,
 
 
In essence, REITs in Singapore are exempted from tax if the Trust distribute at least 90% of the distributable incomes to unit holders. The Trust also has a gearing limit up to 45% of total assets (without requirement for credit rating) and can only undertake property development activities up to 25% of its investment properties. You can read the initial guidelines at Monetary Authority of Singapore and changes to the REIT’s guidelines (last year) here
 
The Investment Quadrant taught here is mainly for growth companies and may not be suitable to analyse REITs as the Trust is a very unique animal and we cover them greater depth at Dividend Machine.
 
 

Alex Tan replied 6 years ago

Hi Rusmin,

My first question was about how do you see huge finance costs as a risk to REITs?

Rusmin Ang replied 6 years ago

I personally do not see high finance cost as barrier to invest in REIT and REIT is a highly regulated instrument, i.e. gearing not more than 45%, would limited the Manager from taking too much risk. Some REITs may have conservative gearing profile while others may try to maximise to the gearing limit. It’s up to investors to choose which REIT that is suitable for them. In any case, investors must be comfortable taking risks such rise of interest rate. If one’s not comfortable with them, it is better to stay away. :)