When interest rates go up, it becomes more expensive for REITs to borrow money to refinance their loans, which erodes dividends.
This can spell trouble for Real Estate Investment Trusts (REITs), and Frasers Centrepoint Trust (FCT) is definitely feeling the heat.
Over the past few years, FCT’s cost of debt has nearly doubled, going from 2.16% in 2021 to 4.2% in 2024.
This significant increase not only affects borrowing costs but also eats into the dividends that investors have come to expect.
Despite this, FCT has achieved a dominant position in the suburban mall sector in Singapore that will likely remain unthreatened for a long time.
Table of ContentsCost Of Debt Ballooned Since Fed Rate Hikes
Risk-free returns are literally effortless to achieve right now due to the persistently high interest rates, and borrowing costs have hovered at a two-decade high for nearly a year by now.
As a result, when REITs need to refinance their existing loans (which were secured at a much lower cost), they have to borrow at much higher rates.
I have collated the table below showing Frasers Centrepoint Trust (see financial updates) average cost of debt from pre-pandemic days in 2019 to the present day.
The dates correspond to Frasers Centrepoint Trust’s release of financial results, which illustrates how brutal the environment is and why prices are tanking.
The cost of debt has almost doubled since 2021, which is eating into the income generated by the portfolio of properties. And yes, it is a little higher than I would have liked.
In comparison, the average cost of debt for both CapitaLand Integrated Commercial Trust (CICT) and Lendlease Global Commercial REIT (LREIT) is 3.5% as of 31 March 2024.
Also, remember that REITs use borrowed money (loans) to manage their