CURRENCY RISKS AND INTERNATIONAL OFFICE INVESTMENTS

Abstract

International investment in property has become a persistent feature of real estate markets in the developed economies. Real estate investors and advisers increasingly act in a global capacity. Cross border activity means that real estate investment must focus not only on cashflow patterns - changes in rents and capital values - but also on the impact of currency movement. Incorporating the exchange rate fluctuations into the analysis of an international investment can substantially alter the expected risk and return characteristics. With fluctuating exchange rates, the value of a profitable real estate investment could be devastated when converted to an investor's domestic currency. This risk should be recognized and incorporated into the international investment decision. This study analyzes a US-dollar-denominated portfolio of office investments in seven Asia Pacific cities and five cities in the Europe region over the 1986 to 2004 period. Specifically, it is hypothesized that currency risk has a significant impact on a USD-denominated portfolio of international office investments in a period of increased volatility and uncertainty. The results of empirical tests in support of this hypothesis are presented. Dollar-denominated returns rise on international assets held by US investors when the dollar declines in value, all else equal. It was found that currency fluctuations has a positive impact and is statistically significant on an international portfolio's returns in these sampled countries from the perspective of an US investor. Therefore US investors do need to be aware of the currency fluctuations when investing in an international portfolio of office investments in the sampled countries.