FCT’s inclusion in STI a reminder to investors that quality matters amid higher interest rates

EARLIER this week, Frasers Centrepoint Trust (FCT) replaced Philippine spirits maker Emperador as one of the 30 components of the Straits Times Index (STI).

This brings the number of real estate investment trusts (Reits) within the STI to seven – up from six since June last year, when Keppel DC Reit was dropped to make way for Seatrium.

The addition of another Reit to the STI might be surprising to some investors, as it comes in the wake of a bearish shift in interest rate expectations.

Notably, the 10-year US Treasury bond yield is now hovering just above 4.3 per cent, up from below 3.8 per cent in December.

Reflecting the change of mood in the market, the iEdge S-Reit Index has returned minus 9.4 per cent this year (up to Mar 15). The STI held up better, with a total return of minus 1.8 per cent.

FCT’s inclusion in the STI against this tough backdrop is a timely reminder that the Reit sector is quite diverse in terms of quality.

While some Reits have buckled under the pressure of rising interest rates and even stopped paying out distributions, other Reits have managed to continue raising capital and expanding their portfolios – reflecting their exposure to resilient segments of the real estate market as well as the backing of strong sponsors.

In fact, FCT has outperformed the iEdge S-Reit Index by a long way. It was the second best-performing component of the index since the beginning of this year, with a total return of minus 1.7 per cent. The only other component of the index that performed better during the period was Sasseur Reit, with a positive total return of 0.7 per cent.

FCT was also the second best-performing component of the Reit index since the beginning of 2023, with a total return of 11.9 per cent. Digital Core Reit was the best performer, with a total return of 13.9 per cent.

The iEdge S-Reit Index returned minus 3.5 per cent during the period.

One reason for FCT’s relatively good performance is that its portfolio consists entirely of properties located in Singapore, where occupancy rates and asset valuations have held up well.

On top of that, FCT managed to expand its portfolio during the pandemic. In particular, it said in September 2020 that it would acquire the 63.1 per cent of the AsiaRetail Fund (ARF) that it did not already own for S$1.057 billion.

ARF held five shopping malls and an office building in Singapore, with a total agreed value of S$3.065 billion.

FCT raised more than S$1.3 billion through a placement and preferential offering of new units, which expanded its total outstanding units by more than 50 per cent.

In another significant move, FCT said in January that it would pay S$523.1 million to acquire an additional 24.5 per cent effective interest in Nex – a shopping mall close to Serangoon MRT station that has some 634,631 square feet of net lettable area. FCT will hold a 50 per cent effective stake in Nex following the transaction.

Last month, FCT raised S$200 million through the sale of more than 91.7 million units at S$2.18 each – most of which will be put towards the purchase of its additional interest in Nex.

FCT is not the only Reit that is expanding and enhancing its portfolio despite the sector-wide headwinds.

Also within the Frasers Property group, Frasers Logistics & Commercial Trust (FLCT) said earlier this month that it would acquire an 89.9 per cent interest in a logistics and industrial portfolio of four properties in Germany for 129.5 million euros (S$188.9 million).

FLCT said the acquisitions will be funded with debt, with the deal expected to be completed this month.

Elsewhere, Mapletree Logistics Trust (MLT) said last month that it would acquire three logistics properties – one in Malaysia and two in Vietnam – for a total of S$234 million.

MLT said it would finance the acquisitions with the proceeds of more than S$200 million from recent divestments and some additional debt.

Both FLCT and MLT are components of the STI.

As FCT bolsters the weightage of Reits in the STI – from roughly 12 per cent to about 13 per cent – investment funds could continue flowing towards these income-oriented structures, especially the ones that are still functioning as they should despite higher interest rates.