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Asian Investors Getting Less Bang for Their Buck in U.S.
New research by CBRE shows that rising U.S. interest rates and an uncertain outlook for the dollar have driven up hedging costs significantly over the past year for investors from Japan and South Korea. That’s making it more difficult for them to compete for U.S. real estate deals. And it doesn’t look to get any easier. With two more U.S. interest rate hikes planned for 2018, and rates in Japan and South Korea expected to remain static, hedging costs will likely increase further.
CBRE’s Global Chief Economist Richard Barkham writes, the annual cost of hedging against dollar depreciation for yen investors (Japan) has increased by 60 basis points (bps) over the past six months, while the cost for won investors (South Korea) has increased by 165 bps. At current exchange rates, a won investor faces hedging costs of about 1.9% per year, while a yen investor faces about 2.8% per year. When considering a property with a cap rate around 5%, hedging costs would erase about half the cash-on-cash yield.
This is beginning to impact the market, points out Barkham. The rolling 12-month U.S. investment volume decreased by 62% year-over-year for both Japanese and South Korean investors. Although volume had been declining throughout 2017, the drop-off accelerated in early 2018. Barkham writes, “This is not to say that Asian investors are out of the game. Deals are still getting done, but the pace has slowed as investment strategies adjust.”
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