How currency, interest rate shifts are combining to reshape capital flows

Cross-border real estate investors are taking advantage of changing market conditions

June 03, 2020

Cross border real estate investors are reshaping their existing strategies to take advantage of exchange rate volatility and interest rate convergence as the global economy navigates continued uncertainty.

Norway, a major source of overseas capital in recent years, has recently seen its krone depreciate due to energy market volatility since the start of 2020. In March, the krone reached its lowest point against the US dollar since 1971.

This means Norwegian investors owning US dollar-denominated assets bought in the past five years have seen a substantial increase in the value of their USD equity, explains Adam Liden, global derivatives director at JLL.

“Norwegian investors – a significant force in real estate markets across the world – may now find that their overseas equity is worth a lot more,” Liden says.

For example, a Norwegian investor who invested in euros in 2015, exchanging Norwegian kronor to euros at the time of the transaction, is estimated to have enjoyed around a 35 percent value increase in equity because of the Norwegian krone’s fall against the euro, says Liden.

“Divesting from overseas investments made at different points in the real estate cycle may make sense,” he says. “There could also be positive mark-to-market value increases in existing hedge contracts.

“If the value of an investors equity has increased by 35 percent, a 50 percent loan-to-value ratio would mean a total value increase on the investment by around 17 percent, all else equal.”

Interest rate convergence

Fellow European investors are seeing a lot lower hedging costs when heading to the U.S. now compared to the last five years, with investments made more recently also benefitting from the convergence of global interest rates.

“When you look back at the situation in the U.S. just a year ago, the talk if anything was of higher interest rates,” says Pranav Sethuraman, global capital markets research manager at JLL. “But that scenario has quickly changed as macro-economic outlooks have been brought firmly into view.”

US dollar-denominated investors that bought when the interest rate gap with Europe was wider are also in a comfortable position.

“The gap between US interest rates, which have fallen significantly during Covid-19, and eurozone rates, is smaller than in a very long time,” says Liden.

The five-year US dollar interest rate swap has fallen from around 2.2 percent a year ago to 0.35 percent. This means that US dollar-denominated investors who acquired assets in Europe a year ago, and hedged their equity investment via a cross-currency swap, have an equity position worth around 8 percent more than a year ago. Their overall returns may have increased by as much as 23 percent if leveraged to around 65 percent.


In the opposite direction, the U.S. has proven particularly popular with euro-denominated investors, with German fund managers leading the way.

“European, largely German institutional investors have grown fond of assets ranging from New York offices to Pan-American logistics,” Sethuraman adds. “Right now, we’re of course at a significant moment in terms of price rediscovery; reassessment of existing positions is foreseeable.”

For UK investors in eurozone markets, there could also be reason to reassess current portfolios. Sterling depreciation over the past five years means a typical 2015 investment in Paris could be worth as much as 20 percent more today than at purchase.

“The pound has taken a hit against the Euro in the past five years,” says Liden. “Likewise, Malaysian investors have seen their ringgit weaken by around 16 percent over the same period, giving them a preferable position on their equity in European real estate.”

Investors from both Singapore and Hong Kong have seen their own currencies strengthen against the euro. And while the South Korean won has lost around eight percent against the Euro since 2015, investors who have placed capital in major European gateway cities are now turning to less established locations within the same economic zone.

“There’s been a notable shift made by South Korean investors to central and eastern European cities over the past 12 to 18 months,” says Sethuraman, pointing to their enthusiasm for Poland and the Czech Republic.

“Major Asian currencies have performed rather well against the Euro in the past five years and currency movements are rather small compared to how other major currencies have moved against the Euro,” says Liden.

When investors buy assets in other countries and currencies, their equity has always been at some risk from both moving exchange and interest rates, says Adam Liden.

“The past two months have dramatically accentuated that,” he says. “And the need to mitigate that risk is likely to become more common in the coming months.”