Dollar's fall can hurt REITs, warns Moody's

A new report from ratings agency Moody's Investors Service says the Australian dollar decline is credit negative for retailers because it will raise the price of imports. The same applies to real estate investment trusts (REITs) exposed to retailers, who will likely press for new or renewed leases at lower levels than expiring leases.

The report says the shift is credit positive for Australian miners and the oil and gas sector, where, if sustained, it will help preserve margin and cash flow in the weak and volatile commodity price environment.

"While the Aussie remained high against the US dollar, retailers benefited from cheaper imports, which helped sustain sales and margins despite low consumer confidence and rising input costs," Maurice O'Connell, vice-president of Moody's Investors Service, writes. "Although the lower Australian dollar-US dollar rate will alleviate some of the negative effect of online shopping, retailers may be forced to raise retail prices on imported goods to maintain margins, which may curb consumer spending amid already weak consumer sentiment.

"We estimate that the net effect of a drop in exchange rate to 92¢ from $1.03 could diminish some major retailers' earnings before interest, tax, depreciation and amortisation (EBITDA) around 2 per cent to 5 per cent (assuming the drop is sustained for the full financial year)."

Moody's said a sustained lower Australian dollar would also have a credit negative effect on REITs such as Westfield Group (rated A2, negative outlook) and the GPT Group (A3, stable outlook).

"Westfield, for example, reported that Australian specialty sales increased by only 0.1 per cent in its Australian centres in the 12 months to March while occupancy costs (the percentage of rent to revenue) increased to 19.1 per cent from 18.8 per cent over the same period," the Moody's report says.

A report from BIS Shrapnel says retail property remains highly sought after.

BIS Shrapnel senior project manager Maria Lee said the level of transactions set a record last year and strong investor interest had continued this year.