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Frasers Commercial Trust: Key Risks

Frasers Commercial Trust (SGX: ND8U) could see its distribution per unit (DPU) rise in the coming years. However, there are some risks that could derail its growth. Here are three key threats to its potential growth.

Inefficient use of its financial flexibility

My investment thesis for Frasers Commercial Trust included its healthy financial position. The REIT, which is backed by property giant Frasers Property Ltd (SGX: TQ5), boasts a gearing of 29.3%, which is well below the 45% regulatory ceiling and is also one of the lowest gearing levels among S-REITs.

However, a low gearing does not always equate to long-term growth. It very much depends on how its management utilises its financial capacity, or even if management can find any opportunity to put its healthy debt headroom to use.

Inefficient use of its financial flexibility will likely limit Frasers’ growth.

Currency risks

The REIT is also exposed to currency risk. In the quarter ended 30 June 2019, it derived 39.5% of its net property income from Australia and another 9.4% from the United Kingdom.

Both of these markets are facing uncertainty. The Australian dollar has continued its decline. In the last 12 months, the Australian dollar has fallen another 5% and continues to be a drag on Frasers Commercial Trust’s DPU (which is paid in Singapore dollars).

The uncertainty surrounding Brexit has also put pressure on the British pound. Furthermore, if a no-deal Brexit materialises, I fear the British pound may decline even further.

Organic growth in distributable income unable to make up for DPU support

Lastly, Frasers Commercial Trust is currently supporting its DPU through the distribution of capital returns amounting to S$16.7 million over the nine-month period ended 30 June 2019.

To sustain its DPU at this level without “DPU-support,” the trust will need to rely on the additional income from higher occupancy at Alexandra Technopark. However, Google will only move into the business park in the first quarter of 2020. As such, investors will need to see if the higher occupancy there will be able to sufficiently make up for the shortfall once the income support is removed.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.  Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.