Regulator gives Singapore Reits a vote of confidence

Standard & Poor''s analysts explain how recent regulatory changes are enabling local Reits to take on more risk in the search for greater yield.

Singapore Real Estate Investment Trusts (REITs) have been given a vote of confidence by the government with recent changes in regulation that could open the door for these trusts to take on more risk in the search for greater yield. Equally, however, the new framework for Singapore REITs provides more detailed and prescriptive regulation surrounding property development activity and corporate governance that should protect investors from management excess.

Ever since CapitaMall Trust listed as the first Singapore REIT in July 2002, REITs have become an alternative and increasingly popular channel for investors to participate in Singapore's real estate market. Today there are seven listed REITs in Singapore, with four concentrating on retail assets, one on office assets, and two on industrial assets. REITs provide a number of advantages to investors and to the property market as a whole. Not least of these is greater transparency than real estate operating companies, which has driven ever-increasing investor demand for this asset class.

REITs provide smaller investors access to enjoy the benefits of pooled investment in commercial real estate. Trusts can undertake financial gearing by using pooled assets as collateral and by separating income from the REIT in order to maximize the credit rating. Alternatively, they can move down the credit curve by issuing unsecured debt against flows of rental income that are derived from the REIT (see Table 2 below comparing differences between Commercial Mortgage Backed Securities (CMBS) and Corporate Credit Ratings).

Compared with direct holdings in physical properties, REITs are also a more liquid investment for investors, freeing them from the administrative burden of tenancy and asset management. The strong performance of REIT unit prices compared with both the stock and property indices in Singapore highlights their popularity and their receptiveness to the investor market (see Table 1).

Table 1 Singapore REITs Historical Equity Price Performance

  A-REIT CapitaCommercial CapitaMall Fortune Mapletree Suntec Prime
Segments Industrial Office Retail Shops Retail Shops Industrial Retail Shops Retail and Office
Date of listing Nov. 19, 2002 May 11, 2004 July 16, 2002 Aug. 12, 2003 July 28, 2005 Dec. 9, 2004 Sept. 20, 2005
% increase in unit price since listing to Oct. 21, 2005 134% 31% 142% 20% 56% 5% 3%
Changes in Singapore stock index since listing 61% 24% 41% 43% (5%) 12% (3%)
Changes in corresponding property index* (6.5%) 2.8% (3.2%) N.A. N.A. 1.8% N.A.
*Released by the Urban Development Authority, to the nearest quarter. N.A not available.

As investment vehicles, REITs are regulated by Singapore's de facto central bank, the Monetary Authority of Singapore (MAS). With growing investment into REITs by both institutional and mum and dad investors, MAS recently revised and updated its regulation after consultation with market participants. The revised regulations draw heavily on other successful REIT markets such as Australia, and are designed both to allow greater debt usage by the Singapore trusts and enhanced oversight for investors.

From a credit perspective, the greatest change will be to permit REITs to increase their gearing from a maximum of 35% debt to deposited property, to a maximum of 60%, but only for those with a credit rating from an approved international credit rating agency such as Standard & Poor's. So far, only one Singapore REIT, CapitaMall Trust (A-/Stable/--), has a Standard & Poor's credit rating.

Experience in Australia suggests debt usage at these REITs is unlikely to exceed 45%-50% of assets, however, because debt investors get uncomfortable at levels beyond this, and subsequently demand too high a return for a trust's movement down the credit curve. Standard & Poor's, anyway, considers debt to assets to be a blunt tool for analyzing leverage, as asset valuations are inherently cyclical. This cyclicality encourages a property group to leverage up during buoyancy in the property cycle, thereby heightening its exposure to any deterioration in market conditions. Accordingly, Standard & Poor's has traditionally, and will continue to focus its assessment on cash-flow based measures of leverage--such as debt to EBITDA, cash flow to debt, and free operating cash flow to debt--which although influenced by market cycles, provide a more transparent view of credit quality.

Indeed, one of the greatest benefits of REITs to the sector as a whole has been to focus attention onto the flow of rental income, and away from capital gains. Standard & Poor's considers this an excellent development because attention is paid to the yield on capital employed from disciplined management of the properties as active investments, and increasing the long-term capital value in the process. These benefits are magnified in Singapore, where there is a natural limit to the supply of property because of geographic constraints.

Key Aspects of Maintaining REITs' Credit Health

REITs have also added greater discipline to the real estate sector because investment mandates of these trusts make certain stipulations and are subject to scrutiny that traditional property companies are not. This makes it difficult for REITs, say, to hide debt in subsidiaries or joint ventures because of the simplicity of REITs' balance sheets and the transparency that accompanies these investment vehicles. The MAS has recognized the risks for REITs investing less than 100% ownership in properties, and after seeking consultation has formalized acceptable ownership structures.

Corporate governance

Standard & Poor's likes to see robust and independent scrutiny of management's capabilities and performance. Transparency of dealings with third parties by management is of particular importance, as is management's adherence to well-articulated investment mandates and strategies. Clear and frequent communication with unitholders is a vital part of good governance. The MAS has codified these governance standards, recommending a licensing framework, the calling of unitholder meetings, and protocols for removal of a REIT manager.

If the interests of management are aligned with those of investors, Standard & Poor's takes comfort that management will act in the best interest of all parties. Creditworthiness benefits when all parties' interests are aligned. Oversight of the REIT by independent trustees is also a plus for credit quality. The MAS is proposing to require transaction fees to be paid in units only for interested-party transactions. This is designed to avoid potential conflicts of interests, but comes at a potential cost to the REIT manager. Furthermore, where a property is transacted with an interested party, the MAS will require the REIT to obtain two independent valuations.


An important aspect in assessing the credit quality of a portfolio of properties is the tenant mix and the profile of tenancy agreement expiries. By and large, a broad array of tenants is good for credit quality, although anchor tenants provide stability to tenant turnover and to cash flow. Bunching of tenancy renewals is to be avoided as it can expose REITs to greater renewal risk when leasing activity is subdued. The MAS has sought to delineate the minimum tenancy disclosure, which will provide a consistent and comparable set of information of a REIT's tenant profile.

Development activities and offshore investment

The MAS is of the view that a REITs exposure to risks associated with property development should be restricted to 10% of the REITs deposited property. Any development that has substantial pre-committed leases will not be excluded from this limit. Standard & Poor's believes that property development is inherently more risky than owning and operating income-producing properties. In Australia, a number of listed REITs have been substantially increasing their exposure to property development in a bid to boost returns to unitholders. Although Standard & Poor's considers that some diversification can assist creditworthiness, the inherent risks of developing property, combined with the absence of cash flow stability from these activities, tend to add volatility to earnings, and reduce creditworthiness.

The MAS has also sought to allow REITs to invest in real estate, whether freehold or leasehold, in or outside Singapore. An investment in real estate may be by way of direct ownership or a shareholding in an unlisted special-purpose vehicle constituted to hold or own real estate. The MAS allows for investing into real estate as a joint owner. When REITs invest in joint ventures, Standard & Poor's consolidates any debt held in that joint venture on a pro rata basis. Standard & Poor's also takes into consideration the risks and challenges of any investments made in overseas markets (see related articles at the end of this document).

Funding strategies

Singapore REITs have become extremely popular with equity and debt investors in Singapore as well as foreign equity and debt investors. The MAS has changed the regulation on gearing, now allowing debt to deposited properties up to 60%. This makes it likely that Singapore REITs will tap domestic and international debt markets. Those REITs that attain investment grade ratings should be able to raise unsecured debt, but those with lower ratings may need to use structured debt products that provide extra security to lenders. The MAS guidelines referenced that the credit rating would need to be obtained on the 'property fund'. Standard & Poor's believes that the corporate credit rating is a meaningful benchmark that will satisfy the MAS requirements (see Table 2 below).

Table 2 Differences between Commercial Mortgage Backed Securities (CMBS) and Corporate Credit Ratings
Commercial Mortgage Backed Securities Corporate Credit Rating
First registered mortgage Security not required
Detailed analysis of security value and cash flows Portfolio-wide analysis of assets
Explicit loan-to-value (LTV) and debt service coverage ratios (DSCR) No LTV and DSCR controls, but rather rating to a financial policy
Finite tenor of bonds Long-term horizon, with no specific tenor
Liquidity facility (may be required) No liquidity facility required
Bankruptcy remote special-purpose vehicle issuer Corporate economic entity is considered
Dealing with assets ?prescribed limits and controls Dealing with assets ?related to the REIT's corporate strategy
Pre-determined limitations regarding additional debt REIT's financial strategy to debt-fund asset growth is considered
Provisioning for potential liabilities (capital expenditure and re-let) No cash flow provisioning for potential liabilities
Cash flow and waterfall controls No cash flow controls required
Rating reflects probability of default, including recovery Rating reflects probability of default. Recovery rating provided separately on discrete secured assets.

Singapore Real Estate Market Snapshot

Barring unexpected increase in supply in the office and industrial space sectors and disruption in regional economies, all property segments could improve from the current weak position, and therefore REITs in these segments should benefit. The environment for the retail segment, which has been resilient in the past, may become more challenging. REITs in this segment will have to ensure the maintenance of strong asset quality and robust asset and tenant management to continue its solid performance thus far.

Office: Near-term outlook of moderate improvement and more controlled supply

  • Weak demand after Asian crisis and SARS has not mopped up the steady supply coming on-stream.
  • Known supply coming that will be completed in the next five years equals 8.2% of existing stock, increasing total supply by 5.7% (after retirement), compared with a 4.4% increase today from five years ago.
  • Vacancy rates will only improve from the current 15% level if the increase in take-up exceeds 1% per year over the next five years. This looks achievable in the near term considering the 3.7% increase in year-over-year take-up in the second quarter of 2005 (to June).
  • As take-up has increased after bottoming out in 2004, and because prices remained stagnant, rental yield recovered strongly to 8% from a trough of 5.8% in the fourth quarter of 2000.

Retail: Increasing supply could weaken medium term outlook

  • The most resilient property sub-sector, with more measured supply leading to lowish vacancy rates of about 10% over the past few years.
  • More bullish sentiment has induced a larger supply in the pipeline, and known new completion in the next five years equals 14.6% of existing stock. Total supply in the next five years is estimated to increase by 11.8%, compared with a 2.6% increase today over five years ago.
  • Beyond five years, shop space could be boosted by the expected construction of two integrated resorts.
  • There will need to be at least a 2% per year increase in take-up for vacancy rates to remain below the current 10%. This could be a challenge as take-up increased only 0.5% in the past five years.
  • Prices and rentals could be under downward pressure going forward because of high vacancy rates.
  • Given slow population growth in Singapore, further growth in take-up will largely rely on the country's ability to improve tourist spending.

Industrial: Limited supply provides some upside

  • Supply has outstripped demand in recent years, pushing vacancy rates out to 11% from about 3% a decade ago.
  • Supply in the pipeline is expected to be limited, with known new completion of only 9.5% of existing stock in the next five years and total supply estimated to increase only 5.1%.
  • As such, only a 1% per year increase in take-up is required for vacancy rates to remain at the current 11%. This looks achievable, as there was compounded growth in take-up of 2.5% in the past five years.
  • Prices and rentals could improve if take-up growth rate shown in the past five years is sustainable.
Table 3 Current Market Participants - Financial and Operating Statistics
  A-REIT CapitaCommercial* CapitaMall Fortune? Mapletree? Suntec? Prime?
Date of financials March 31, 2005 Dec. 31, 2004 Dec. 31, 2004 Dec. 31, 2004 May 31, 2005 June 30, 2004 Sept. 20, 2005
  Credit statistics
Revenue (mil S$)
EBITDA (mil. S$) 83.6
Funds from operations (FFO, mil. S$)
Total debt (mil. S$)
Operating margin (%)
Return on permanent capital (%)
EBITDA interest coverage (x)
FFO to total debt (%)
Total debt to capital (%)
Total debt to deposited assets (%)
  Operational statistics
Total deposited assets value (mil S$) 2,076.9 1,918.2 2,235.0 929.8 422.0 2,150.0 1,303.0
Number of properties 36 7 5 5 15 2 2
Lettable area (thousand sq ft) 9,486.2 1,820.5 2,206.0 1,028.2 8,534.5 2,061.1 617.0
Number of car park lots N.A. 2810 3283 676 N.A. N.A. N.A.
Occupancy rate (%) 94.1 95.2 89.9 94.9 95.2 89.1 92.1
Weighted average tenancy tenor (years) ** 7.3 2.7 2.1 1.9 8.6 2.0 4.2
Number of tenants 470 258 1,245 438 30 340 168
Percentage of revenue from top 10 tenants (%) 44.8 54.2 21.7 N.A. 63.3 29.9 56.3
*Revenue and FFO are annualized. Converted using exchange of HK$4.5=S$1. Pro forma. N.A.-Not Available. **Tenancy term to maturity weighted by floor space letted.


The Singapore REITs are setting the standard in Asia for the long-term development of a viable REIT market. Standard & Poor's believes that the strengthened oversight and enhanced disclosure requirements will benefit the current incumbents. The more flexible debt usage and partial ownership of properties will allow these REITs to satisfy the equity investors' requirements for a greater return on funds employed. Standard & Poor's believes that the current incumbents will take advantage of the MAS guidelines and seek to expand their asset bases with increased debt.

The ability to grow and maintain a moderate financial profile will stem from the continued support from the unitholders, who will want the REIT manager to augment a solid equity return, and the debtholder, who will now have a greater stake in the composition of the REIT's capital. Invariably, the seven incumbents will have differing degrees of success, and their ability to source solid income-producing assets will be key to that success.

[The article is an abstract from RatingsDirect, Standard & Poor's Ratings web-based credit research and analysis system ( To learn more, please click on About RatingsDirect.]