INTEREST RATE RISK MANAGEMENT FOR FOREIGN PROPERTY DEVELOPMENT

Abstract

Past experiences have shown real estate players, especially those with overseas investments, the pitfalls of ignoring interest rate risk. The interest rate risk is the inevitable corollary of taking on a real estate development or construction loan. This dissertation's main purpose is to introduce to real estate players, specifically the property developers, the interest rate swap, a financial derivative instrument used for hedging interest rate risk. The focus of this research will be on the hedging of interest rate risk, faced by property developers, when proceeding with a large-scale property development in an unstable overseas market. The developers' interest rate risk will arise out of the construction loan taken. This interest rate risk will be gauged using a comparison between the funding cost cash-flow, with and without hedging. This research establishes that the interest rate swap can help developers in mitigating their interest rate risk, preventing a loss in equity value of their project in times of rising interest rates, and most importantly, bringing certainty to their funding cost.