SINGAPORE (April 6): Covid-19 has really upset the apple cart. With the circuit breaker underway, many retailers including fast fashion, beauty salons, nail bars and spas have to close. In the wake of this displacement, and the amount of economic activity coming to a standstill, the government has announced three budgets, the Unity Budget ($6 billion), the Resilience Budget ($48 billion) and the Solidarity Budget ($5.1 billion).
Along with the Resilience Budget and Solidarity Budget, the government passed a new bill to defer contractual obligations to allow retail tenants to defer rental payments for six months. The new bill also ensures that landlords pass on property tax rebates which is 100% for retail, to tenants. The Monetary Authority of Singapore announced various financing schemes that SMEs including retailers can tap on.
Although details on the new bill to defer contractual obligations are not available yet, this is likely to be the most anticipated development for retailers. “Though retailers have to eventually pay back deferred rents, this bill will give a lot of breathing space to retailers given that rents can make up around a third of business costs,” notes Wong Xian Yang, Associate Director, Research, Singapore and Southeast Asia, Cushman & Wakefield. “Although the qualifying criteria (if any) for tenants to apply for deferment is still unclear, many tenants are expected to utilize this bill,” he adds.
Landlords will have to fully pass on of the full property tax rebate to tenants, translating into rental savings for tenants.
Impact on landlords
“Landlords seem to be getting the short end of the stick. Landlords still need to service their mortgage loans, which consist of interest costs and principal repayments. Unless landlords are also getting a reprieve from the banks, their short-term cashflow would also be impacted,” Wong points out.
Indeed, this is a point that the REIT Association of Singapore (REITAS) highlights in a recent press release.
Because of the nature of REITs having to pay out 90% of their annual distributable income to qualify for tax exemption, REITs unlike companies, do not have any retained earnings as buffers in times of crises.
“A 6-month deferral of rent would essentially deprive the REIT of its predominant source of distributable income for up to 6 months. Even with the best of intentions, it is also not realistic to expect our tenants to accumulate 6 months of rent and promptly pay the landlord thereafter,” REITAS says in a media release on Apr 6.
Strain on REITs’ financial obligations
As a result, significant strain is placed on the S-REIT's ability to service their financial obligations. In addition, lower rental income will also affect REITs’ operational obligations such as GST payments, and fees.
If REITs forgo rentals for a period of time, their interest coverage ratios (ICR) would deteriorate as would rental outlook. ICR, and Ebitda/debt ratio would affect credit ratings. Lower rent outlook and lower cash flow would impact valuations. For REITs, valuations depend on their cash flow because they are valued based of discounted cash flow or DCF.
Lowering rents would in-turn negatively impact S-REITs' financial stability. REITAS points out this would include increased borrowing costs from ratings downgrade which has already materialised for some retail REITs, difficulty in refinancing, and leading to a possible breach of the 45% aggregate leverage ceiling.
REITs seldom pay down their loans, and many of the loans are bullet loans (those which are repaid or refinanced on maturity), hence capital management and refinancing is an important part of REIT management. If REITs’ cannot refinance their loans, that could lead to all sorts of problems.
“Left unmitigated, the widespread deterioration in S-REIT credit and financial standings would in-turn destabilise the banking industry and Singapore's financial ecosystem,” REITAS warns.
Is there a solution?
REITAS suggests some form of ‘circuit breaker mechanism’ for key regulatory and credit metrics directly impacted by rental deferrals, and “a level of underwritten financial support from the government that is proportional to the deferment of rental income, which in turn is passed on to unitholders”.
Some landlords have gone above and beyond the call of duty. Lee Chee Koon, CEO of CapitaLand said in a message to shareholders that the group had committed $100 million - excluding the property tax rebates - to its ecosystem partners. The Edge Singapore understands that " very big bulk of $100 million went to the malls”.