Lower $A not all bad for REITs
The weaker Australian dollar has led to uncertainty for the real estate investment trust sector due to concern it may erode some earnings for offshore investors.
But the overall impact will be of less concern than five years ago, when more of the Australian REITs owned assets overseas. Many have now sold the properties as they focus on domestic investments.
Westfield remains the international REIT for Australian investors, with co-chief executive Peter Lowy saying that a 10 per cent drop in the value of the Australian dollar equates to a 1 per cent rise in earnings for the retail landlord. UBS analyst Grant McCasker said that, since 2008, Westfield's earnings growth had been affected by the appreciating Australian currency.
"If this was to reverse, Westfield has significantly increased its leverage to a movement in the $A/$US," he said. "If the $A/$US declined 10 per cent over the next two years, Westfield earnings growth would improve by 3-4 per cent.
"All else being equal, we estimate this would potentially offset dilution from further asset sales in the US of about $US2 billion."
UBS's economists said they saw the $A at US95¢ by the end of 2014 and back to US90¢ in 2015.
"The central case being that if global growth improves moderately, and there's some normalisation of global interest rates, the $A should be biased to move lower ... with the risks being to the central case of the US economy not strengthening, quantum easing (QE) lasting longer than current expectations and significant drop in commodity prices," the UBS economists said.
CBRE's head of research for Australia, Stephen McNabb, said in his report on the $A/$US that, with the $A trading below parity, it may take some of the pressure off industries such as manufacturing and retail, which could lead to a rebalancing in the occupiers in commercial property.
"As a capital-importing nation, Australia's exchange rate is dependent upon the availability of capital and demand for Australian real estate and financial assets," Mr McNabb said.
"While the $A has and continues to be supported by rate differentials and a structurally higher terms of trade, those factors aren't as strong as they were a year ago.
"In the medium to long term, some reversion of these factors was to be expected. However, for some months, the $A had defied gravity, as commodity prices retreated and rate differentials narrowed."
Mr McNabb said the lower currency could lead to a narrowing in the performance divide between Western Australia and the eastern seaboard states, and some relative support to NSW/Victoria and Queensland over time would benefit the retail, industrial and office sectors in these markets.
But Mr McNabb said the concern that foreign investors may pull back their funds was not as strong as perceived by some commentators.