The stock market is irrational. With “Circuit Breaker” being announced on Friday, I was expecting the stock market to be in a sea of red however it was the reverse. The stock market went up today. Do not be too happy yet as a new Bill that was passed in Parliament today will most likely have a significant impact on S-REITs.
A new Bill for COVID-19 (Temporary Measures) was passed in Parliament today. Under the new bill, landlords will not be able to terminate the lease of tenants or claim back the rented premises if the tenant is unable to pay the rent during the relief period of 6 months. Under the new bill, the landlord is also not able to take legal action.
As part of the COVID-19 measures, landlord must pass the property tax rebates to the tenants. Those landlords that failed to do so will be guilty of the offence and can be fine up to S$5,000.
These measures will definitely add financial pressure to Retails REITs such as CapitaMall, Mapletree Commercial Trust and SPH REIT as the held back of rental payments by tenants will affect the landlord’s operating cash flow. If you didn’t know, S-REITs have to pay out 90% of their annual distributable income in order to qualify for tax exemption. With such added pressure, I believe the S-REITs managers will retain cash for operational purposes and further slash the already miserable dividend payout to investors.
There are certainly pro and cons to the new measures being introduced. If I am a tenant or shop owner, I will definitely benefit from the new measure as reduced shopper traffic and “Circuit Breaker” will impact my business. The new measure relieves the financial burden.
As a dividend investor, I will frown over the new measure as this means higher possibility REIT managers further cutting dividends to sustain their operating cash flow. As land lords are unable to reclaim back the premises should tenants are unable to pay rent, the land lords will not be able to seek new tenants as well, impacting the rental reversion.
Last, we all know REITs derive their revenue from rents. I am not ruling out the possibility of REITs taking up more loans which can further drive up their gearing ratio (cap at 45%).
Live by the sword, die by the sword.
Only $5k fine??!? Then it makes financial sense to pay the fine & withhold the property tax rebates … which can amount to 1 month’s rental worth. For an entire shopping mall or office complex like MBFC, definitely more than $5k.
Ok now reit investors will be demanding reit managers to pay the fine instead LOL.