by Ankita Prasad, Senior Analyst, Asia Pacific Capital Markets
In light of the recent currency volatility from the Renminbi, we have taken another look at our currency report to look at the effects of the currency shift on our return findings. Weakening Asian currencies lead to higher returns for Asian investors on investments made in overseas real estate markets. What matters to investors diversifying into real estate outside their home markets, is the combination of currencies and total returns from property. The devaluation of the Renminbi has an impact on 1 year holding period returns for investors in Grade A office assets.
For RMB investors going into foreign markets, the devaluation of the RMB increases their total returns. With the RMB becoming relatively weaker, when the round trip is made from RMB into USD/Euro and then back into RMB and Chinese investors take their money back to their home markets, they see an increase in their total returns. According to our initial calculations, RMB investors into New York were predicted to receive a total return of 16 percent in 2015. With local property return standing at 16 percent, the devaluation of the RMB would increase their FX gain from 1 percent to 3 percent, raising total returns from 16 percent to 19 percent. If there is more devaluation going forward, FX gains would be even higher, continuing to increase total returns for RMB investors.
Conversely, for foreign investors looking into China for investment opportunities, the devaluation of the RMB reduces their total returns by a similar magnitude. In our initial calculations, USD investors into Beijing were predicted to receive a total return of 15 percent in 2015, comprising a local property return of 16 percent and an FX loss of 1%. With the current RMB depreciation and local property return standing at 16%, we see FX losses for USD investors increasing to 4 percent, reducing the total returns from 15 percent to 12. For Euro investors into Beijing, our initial calculations predicted a total return of 39 percent in 2015, comprising a local property return of 16 percent and an FX gain of 24 percent. With the current RMB depreciation, we see FX gains for Euro investors decreasing to 8%, reducing the total returns from 39 percent to 24 percent.
Chinese investors have been a formidable source of capital flow for the world’s real estate markets, so it’s unsurprising that the recent devaluation in the Yuan has led to speculation over a slowdown in buying interest, particularly in gateway cities such as New York and London? Click on the below video to watch JLL’s Dr Megan Walters give her further analysis on China’s latest currency move and its impact on property investment returns.