The risks facing Westfield

Despite falling back over the last month, Westfield Group (ASX: WDC) has given shareholders consistent growth over the last year, climbing from $9.33 to as high as $12.55 last month – an increase of 35%. Whilst the company has enormous growth prospects and is treating shareholders to daily share buybacks, the company also faces significant risks that investors should be aware of.

The declining Australian dollar

After 12 months of trading above parity with the US dollar, the Australian dollar’s fall in value comes as a huge relief for exporters and companies with overseas operations. For specialty stores and retailers however, it may not be such good news.

Companies such as JB Hi-Fi (ASX: JBH), Myer (ASX: MYR) and David Jones (ASX: DJS) are slowly recovering from their woes caused by online retailers, and have relied on saving costs and selling higher margin products to return to a profitable state. As many of their goods are imported however, a falling AU$ would result in higher costs.

This, in turn, would mean that they would either have to pass those added costs on (which would repel many customers, who can instead shop online) or they would have to accept lower margins on those products, which would also affect profits.

Should the Australian dollar continue to fall, store closures could occur which would decrease Westfield’s profits from rent and would certainly decrease the value of the company’s shares.

Reduced rents

Westfield and other property groups including Lend Lease (ASX: LLC), Federation Centres (ASX: FDC) and Stockland (ASX: SGP) have already been forced to reduce rent rates after a number of specialty stores complained that they could not sustain payments. Harvey Norman  (ASX: HVN), for instance, said it would close a number of stores located in malls, preferring to instead run stand-alone stores. Unless the company can find other ways to boost revenues, lower rent rates could impact on profits.

To combat this, however, Westfield is in the process of expanding and refurbishing its stores in order to drive income growth.

Consumer confidence

Despite interest rates sitting at a record low, speculation of a possible recession next year coupled with declining global growth is taking its toll on the confidence of consumers and businesses alike. According to a Jones Lang LaSalle Survey, rental growth over the next six months is only expected by 29% of centre managers.

Foolish takeaway

Despite the aforementioned risks, Westfield is focused on ridding itself of less profitable stores as it refreshes its asset portfolio and also offers a solid 4.5% dividend yield plus enormous growth potential. As such, the company definitely warrants a position on your watchlist.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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