“Savvy investors are increasingly trading across borders and capital is in many instances boundaryless. Relative value is driven by many factors, including FX and hedging.” – Chris Ludeman, CBRE Global President of Capital Markets
With the sharp drop in U.S. interest rates this year, the differential between U.S. rates and those in countries with lower-yielding foreign currencies has narrowed, contributing to lower hedging costs for foreign investors acquiring U.S.-dollar-denominated assets.
Across eight major global currencies, the annual cost of hedging against U.S.-dollar (US$) depreciation has decreased year-to-date for all but the Australian dollar (AU$). Except for Chinese (CNY) investors, who are the only ones in this group to achieve a boost in IRR when purchasing an asset in US$ and hedging back to local currency at current forward exchange rates, Canadian (C$) investors currently have the lowest hedging costs. The largest decreases year-to-date have been for Japanese (JPY) and Singaporean (SG$) investors.
Overall, the average decrease in hedging costs was 54 basis points (bps) through June 30, though a recent uptick in U.S. interest rates increased hedging costs slightly for most currencies and markedly for Korean (KRW) investors through July 10. Nevertheless, this type of fluctuation is normal and, given the expectation for multiple cuts in U.S. short-term interest rates this year, hedging costs likely will continue trending downward, making the U.S. commercial real estate market more attractive to foreign investors.
Figure 1: Current Hedging Costs for Major Global Currencies
Source: Hudson Advisors, CBRE Research, July 2019.
Figure 2: Annual Cost to Foreign Investors of Hedging US$ Assets Back to Local Currency
*Latest month of data is through July 10, 2019.
Source: Hudson Advisors, CBRE Research, July 2019.
Note: Hedging duration and strategy varies by investor, market and situation. Hedging costs in these figures were calculated as -(12-month forward rate/spot exchange rate-1)*100. Consider a yen investor who sells JPY for US$ to buy U.S. real estate at a spot rate of 108.4. The yen investor hedges by entering into a vanilla forward contract to sell US$ and buy JPY in 12 months at a rate of 105.7, resulting in a loss of 2.48% for the first year.
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