Singapore REIT Sector
S-REITs Not Spared from Economic Crisis
The Singapore real estate investment trust (S-REIT) sector was not spared by the economic crisis in 2009, with the FTSE REIT Index declining by 74.8% from its June 2007 peak to its March 2009 trough before recovering by 120.8% as at 31 December 2009. However, the index was still 44.4% off from its peak in 2007, as at 31 December 2009.
In the first few months of 2009, S-REITs were caught in a vicious cycle of expectations of asset value declines that led to refinancing difficulties. The closure of the commercial mortgage backed securities market and reluctance of banks to extend financing exacerbated the situation further. This drove several S-REITs to seek refinancing through equity fund raising exercises, with CMT leading the way forward. Due to massive recapitalisation activities, the total market capitalisation of S-REITs surged by 137.7% to S$29.6 billion in 2009 from S$12.4 billion in the previous year. S-REITs successfully raised an estimated S$4.8 billion from the equity market, mainly through rights issue exercises in 2009.
Market sentiment began to stabilise in March 2009, when governments around the world pumped fresh liquidity into the banking system and interest rates around the world fell to multi-year lows. With a rebound in unit prices, the average dividend yield of S-REITs has compressed to 6.5% as at 31 December 2009 from 12.0% as at 31 December 2008. This was approximately 380 basis points above the Singapore government 10-year bond yield of 2.7% as at 31 December 2009.
In a comparison of annual total returns of Asian REITs, gains in the REIT markets ranged from 6.1% in Japan to 82.2% in Singapore in 2009.
In 2009, a limited availability of debt financing and unit price corrections have forced S-REITs to restrict their previous aggressive asset acquisition programmes and focus on survival and tenant retention in a difficult market. Many S-REITs have also reduced their capital expenditure plans and development pipelines.
Changes in Regulations
To allay market concerns over write-downs in asset values, the Monetary Authority of Singapore (MAS) announced in January 2009 that S-REITs would not be considered to have breached leverage limits should their aggregate leverage rise due to a decline in property values. The MAS also clarified that refinancing of existing debts by a REIT is not to be construed as additional borrowings.
The Income Tax Act was amended in 2009 to allow distributions by a S-REIT to be made in the form of units of the S-REIT, rather than cash, without affecting the tax transparency treatment granted to the S-REIT, subject to certain conditions being met. This concession applies only to distributions made during the period from 1 July 2009 to 31 December 2010.
The MAS has also introduced a requirement for S-REITs to hold annual general meetings (AGMs) once every calendar year, with effect from 1 January 2010. This is intended to enhance corporate governance by providing an important channel for communication between REIT managers and unitholders. AGMs will provide a regular opportunity for REIT managers to engage their unitholders.
In February 2010, the government announced positive Budget measures for the S-REIT sector. This included the renewal of income tax, stamp duty and goods and services tax concessions till 31 March 2015. The benefits include a concessionary income tax rate of 10.0% for non-resident non-individual investors, and stamp duty remission on transferring a Singapore immovable property to a REIT.
Better Year Ahead
Credit spreads are expected to decline further as the economy continues to recover. An easing of the credit environment coupled with recapitalised balance sheets and compressing dividend yields are expected to revive acquisitions and project development in the S-REIT sector in 2010.
As equity market conditions continue to improve, more REIT listings are expected. Some initial public offerings that had been delayed may come to market as S-REIT valuations continue to be attractive.