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September 24, 2018

Real estate investors in the U.S. are turning their attention to the Asia Pacific region, with a strengthening U.S. dollar and upward pressure on interest rates presenting new currency hedging opportunities.

Hedging costs for U.S. dollar-based investors trading in many Asian countries have improved considerably over the past year. U.S. dollar interest rates are now sitting at a premium to Australian dollar rates for the first time in 16 years. In Japan, an attractive spread between U.S. dollar rates and yen rates has only widened further.

“It’s definitely the way we’re seeing the market move,” says Fergal Harris, head of debt advisory in APAC at JLL.

A big driver of the shift: a growing divide in rate expectations at central banks. While interest rates in the U.S. continue to climb, core Asia Pacific markets have seen relative stability in the interest rate curves.

Upcoming rate hikes at the Federal Reserve, as well as a strong U.S. dollar, are affecting markets like Australia for a number of reasons. For one, the Australian banks are partly funded by wholesale funding, the cost of which will continue to rise under higher USD interest rates. This is putting pressure on the Australian banks to raise their lending margins despite the stable monetary policy position of Reserve Bank of Australia.

Offshore banks and non-bank lenders will see this as an opportunity to lend into a relatively high-yielding market, without the previously burdensome hedging costs.

Already some Australian banks have recently raised mortgage rates, despite no signal of intention from the Reserve Bank of Australia to do so.

Japan has always been a favorable market to hedge into, says Nicolas Wilson, director of Asia-Pacific Capital Markets Research at JLL. “But the hedge benefit is increasing, and you’re seeing investors starting to react,” he says.

The stronger dollar is a benefit to a broad range of U.S. property investors looking to diversify their portfolios.

But commercial real estate debt is becoming a particular focus for global investors, which are increasingly looking at it as a less-risky strategy that has become more attractive as interest rates start to rise and property yields hit record lows.

“It’s a great opportunity for dollar lenders,” Harris says.

To be sure, what has spurred interest from U.S. investors has deterred investment moving the other way. The higher U.S. interest rates have tempered investment demand from Asian countries in recent months. So far this year, investors from APAC have invested US$7.7 billion into the U.S., compared to a total of US$24.4 billion last year, according to Real Capital Analytics.

“What we’re going to see is a new opportunity for U.S. dollar funds,” Wilson says.

Click to read about how a new real estate exchange to help single properties go public.

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Fergal Harris

Head of Debt Capital, Asia Pacific at JLL

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