KUCHING: The Securities Commission’s (SC) temporary increase in gearing limit for Malaysian real estate investment trusts (REITs) is only a short term measure to ease potential cash flow stress.
Earlier this week, the commission announced that it will temporarily increase the gearing limit for REITs from 50 per cent to 60 per cent, effective immediately, until December 31, 2022.
According to the SC, the temporary increase in gearing limit will provide REITs greater cash flow flexibility and allow M-REIT managers to manage their REIT’s debt and capital structures more efficiently, especially in light of the challenging operating environment during the Covid-19 pandemic.
“While positive, we believe that the measure will only temporarily ease potential cash flow stress from lower occupancy rates and asset write-downs due to the pandemic-induced slowdown currently,” the research arm of Public Investment Bank Bhd (PublicInvest Research) said in a note on this move.
“Given current weak consumer sentiment, we still believe the REITs’ defensive attributes are being weakened by higher risks of a credit crisis or a worse-than-expected recession.”
Notwithstanding the temporary increase in gearing limit, the SC also said it expects managers of M-REITs to consider sustainability of the REIT and best interests of unit holders, before taking on any additional debt.
PublicInvest Research reckoned that the new measure could help REIT assets that could be written down due to current market conditions.
“For instance, Sunway REIT, in the latest quarterly release revealed that its assets (mainly malls and hotels) were marked down by circa RM41 million as per latest revaluations.
“As for net gearing of MREITs under our coverage, Sunway REIT’s net gearing is currently at 40.7 per cent while Axis REIT is at 28.7 per cent. IGB REIT is the lowest at 23.5 per cent.”
Meanwhile, AmInvestment Bank Bhd (AmInvestment Bank) highlighted that based on the latest financial results, REITs under its coverage, namely YTL REIT and Pavilion REIT have gearing of 40 per cent and 30 per cent respectively.
The research firm also noted that KIP REIT’s gearing stands at 34 per cent.