CBRE is predicting that lower currency fluctuations and less exchange rate volatility in the next three years will have a reduced impact on regional property markets and international investor sentiment across Asia.
By close of 2014, about a quarter of investment turnover in Asia Pacific, or US$26 billion, involved cross-border real estate transactions. Increased regional activity was largely driven by emerging sources of capital looking to establish geographically diversified portfolios and Asian capital pursuing outbound investments, which has resulted to currency management becoming a vital component in any cross-border property investment strategy. While previous currency volatility has led to capital value declines of up to 8.6% in US dollar terms for Japanese and Australian property investments.
Richard Kirke, Managing Director of CBRE Capital Markets Asia Pacific said, "As seen in recent events, currency volatility in cross-border investments create contrasting possibilities for an investor's return profile. Despite the expected currency losses for existing investors in Japan and Australia, the cheaper currencies support potential real estate opportunities in the tourism, retail and export industries. And while the relatively strong currencies in Hong Kong, Singapore and China make investing in these markets expensive for foreign buyers, it simultaneously provides domestic investors leverage to acquire assets abroad on account of their stronger purchasing power. Buoyed by the stronger dollar, US investors are also predicted to funnel a significant amount of capital into the Asia Pacific region.
While most investors account for currency risk in assessing their return profiles, we expect currency volatility to diminish over the next three years. This will in turn lead to a decrease in the negative impact on property investment returns seen in several countries. Nevertheless, Japan, India and emerging Southeast Asia are still forecasted to experience mild currency devaluation within the next three years, and the subsequent uncertainty of potential returns is likely to have a slightly negative effect on demand from international investors in these markets."
Ada Choi, Senior Director for CBRE Research Asia also commented, "The widely-expected US dollar rate hike sometime this year is predicted to increase the cost of leverage and dampen property yields, while the expansion of Japan's Quantitative and Qualitative Easing (QQE) package is foreseen to weaken the yen further over the next three years, further boosting hotel and prime retail players and supporting their expansionary plans. Currency risks are also expected to be low for Hong Kong, Singapore and China, giving investors a clearer position in real estate acquisitions, holdings and dispositions.
In the short to medium term, real estate activity is seen to benefit from the milder volatility and a lower magnitude of additional currency devaluation in the region. That said, while currency hedging is expected to rank lower in international investors' priorities, engaging external currency management advice can greatly facilitate making informed cross-border investment decisions firmly grounded in real estate fundamentals."
Other key CBRE highlights include:
Recent fluctuations in currency factors which have affected Asia Pacific real estate investment returns include the strengthening of the US dollar, weakening of the euro and country-specific interest rate differentials and monetary policy changes
Cheaper currencies in markets like Japan, Australia, India and Indonesia have resulted in stronger export growth which, in turn, has stimulated expansion and occupier property demand from export-oriented investors
With currency pegged to the US dollar, Hong Kong has had a negative impact on tourism and retail, as observed in retailers' cautious expansionary attitudes and muted activity in the hotel sector
For existing US dollar-denominated investors, the main impact of currency volatility is the erosion of returns in their domestic currency. Particularly affected are investors in Japan and Australia. Conversely, China and South Korea have demonstrated improvements in returns.
Potential investors are able to leverage currency devaluation to invest in countries with lower exchange rates and at a cheaper price. Countries like Japan and Australia have received increased investment activity in 2014--with Japanese inflows increasing by 245% year-on-year in 2014--while the strength of currencies in Hong Kong, Singapore and China facilitated overseas acquisitions and accounted for 47% of cross-border capital flows in Asia Pacific in 2014.