Why real estate investors are watching the dollar

The U.S. dollar’s rise in strength this year is having an impact on how global real estate investors approach the market.

The greenback reached a 34-year high against the Japanese yen in April and has risen against the depreciating euro and UK pound since last year. Analysts at both JP Morgan and Goldman Sachs expect the dollar’s strength against other major currencies to remain for some time.

In the UK, several deals have taken place this year involving U.S. investors galvanized by a strong dollar. Starwood Capital made a $884 million offer for Balanced Commercial Property Trust, a listed UK REIT. Leaf Living, a joint venture between Regis and Blackstone, this year forward funded $740 million in UK single family housing.

“Currency fluctuation has a significant impact on real estate investors engaged in cross-border investments,” says Mattias Baggfelt, Head of JLL Debt & Financial Advisory Sweden at JLL. “The strength of the US dollar is just one element at play.”

When compared with around a year ago, the currency situation for most international investors investing in the UK, for example, is more favorable or neutral now, apart from for Canadian investors, adds Baggfelt.

For sellers, having a closer grip on currency fluctuations can help quickly identify buyers who might be interested in the relative value at play.

“Those sellers who narrow down their focus to a smaller set of investors early in the sales process can avoid multiple rounds of bids and close sales swiftly,” says Baggfelt.

On the flip side, owners’ interest is often piqued if currency fluctuations aren’t on their side. Baggfelt notes that investors with pre-determined exit strategies can find themselves in a pinch if demand shifts due to a lack of foreign buyers.

Investors “who may have been late cycle buyers in 2019, with a five- or six-year exit strategy, may today need to consider when actually might be optimal to divest”, says Baggfelt.

Getting the timing right is also a factor for sellers when considering when best to repatriate proceeds from a sale.

“When the local, home currency is weaker, converting foreign currency proceeds can of course result in higher returns for a seller,” he says. For example, Japanese investors invested in the UK have gained a lot over the past four years, “However, since the summer, the yen has started to appreciate, so this might be the right time to move”.

Currency fluctuations are also impacting the cost of financing. Again, Baggfelt says more investors are aware of the exchange rate risks involved in borrowing in a foreign currency.

“Repayment obligations may increase if the local currency depreciates against the currency of the debt,” he says. “But this risk can be mitigated through hedging strategies or by obtaining financing in the same currency as the property purchase, which we think should be the base case.”

From stock market volatility to central bank decision making on rate setting, the past months have, says Baggfelt, created more demand for data and insight for both sellers and buyers.

“Currency fluctuations often reflect underlying economic conditions,” he says. “Negative currency movements may indicate economic instability or political risk, which can impact both property values and investor sentiment, while on the other hand, positive currency movements may reflect a robust economy, leading to increased investor confidence and demand for real estate.”

There’s still some way to go before real estate investors are fully in tune with the risks and opportunities that come from the ebbs and flows of global currencies, he concludes. “But it’s definitely now more on their radar than in previous cycles.”