Lower $A strikes a blow to retailers, says Moody's
A new report from ratings agency Moody's Investor Services says the Australian dollar's decline is credit-negative for retailers because it will raise the price of imports, and for Australian real estate investment trusts (AREITs) exposed to retailers, which could press for lower new or renewed leases.
The report says it was credit-positive for Australian miners and the oil and gas sector, where if it continued, it would help preserve margin and cash flow in the weak and volatile commodity price environment.
"While the Aussie remained high against the $US, retailers benefited from cheaper imports, which helped sustain sales and margins despite low consumer confidence and rising input costs," said Maurice O'Connell, vice-president, Moody's Investors Service. "Although the lower $A/$US 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 US92¢ from $US1.03 could diminish some major retailers' earnings before interest, tax, depreciation and amortisation around 2 per cent to 5 per cent, assuming the drop is sustained for the full financial year."
According to Moody's, a sustained lower $A would also have a credit-negative effect on AREITs such as Westfield Group (A2 negative) and GPT Group (A3 stable).
The AREITs' exposure to weakened retailers will make it more likely new or renewed leases will be lower than expiring leases.
"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 BIS Shrapnel report says retail property remains in high demand.
Maria Lee, senior project manager at BIS Shrapnel, said the level of transactions set a record in 2012 and strong investor interest had continued in 2013. "Owners are ploughing more dollars into their centres, dusting off development projects put aside in the wake of the global financial crisis," she said.