Since hitting a 52-week high of $11.14 just after the Brexit result, shares of Westfield Corp Ltd (ASX: WFD) have fallen more than 20% to below $8.85 per share.
This is a pretty serious move down for a company considered to be one of the ASX's best blue chip shares and the magnitude of the fall is highlighted in the chart below.
So what is behind the move?
There are two main reasons why Westfield shares have fallen off a cliff since Brexit:
- Collapse of the British pound
Since the Brexit vote, the value of the British pound against the Australian dollar has fallen by around 20%. As the chart below highlights, this collapse has accelerated over the past month.
Because around 28% of Westfield's assets under management are located in the UK, a falling pound will result in a significantly lower Australian dollar valuation due to currency translation. In effect, Australian investors will receive less dollars from the rent and property management fees collected in British pounds.
The pound has also fallen heavily against the US dollar and this has already caused the company to lower its full year funds from operations (FFO) forecasts (expressed in US dollars) from 34.2 cents – 34.5 cents per share to 33.7 cents to 34 cents per share.
Westfield also has a pipeline of projects including the construction of up to 3,000 apartments in various parts of London. The forecast value of these investments is also reduced for Australian investors based on recent currency movements.
2. Bond yields are rising
Long-term bond yields in Australia and the US have finally started to track higher over the past month or so on the expectation that interest rates have bottomed in Australia and are about to rise in the US.
The rise in bond yields makes interest rate sensitive shares, like Westfield, less attractive compared to other income assets.
Higher interest rates are also expected to have a negative impact on Westfield's finance costs as it currently holds more than US$7 billion dollars worth of interest bearing liabilities on its balance sheet.
Other shares in the REIT sector have also been affected by this rotation, including Australian-based shopping centre operator Scentre Group (ASX: SCG).
Should you buy?
After its recent slide, Westfield now trades on a forecast price-to-earnings ratio of around 21 and offers an unfranked dividend yield of around 3.8%.
This isn't particularly cheap if you believe interest rates have bottomed and there isn't an obvious catalyst for the British pound to rebound.
With that said, the shares could be worth a closer look if they fall much further from here as Westfield still owns and manages some of the highest quality shopping centre assets in the world.
