Currency movements reshuffle the GI 100

The impact of currency movements on this year’s Global Investor 100 ranking was made evident in two ways. First, many of the biggest risers in the ranking were based in Europe or Asia, two regions where currencies rose against the US dollar year-on-year. Second, many of the institutions with the largest increases in their allocations to real estate were also headquartered in these two regions.

For example, the biggest riser on the ranking, Japan’s Government Pension Investment Fund, entered the GI 100 at 42. The institution also saw the biggest increase in allocation size, ballooning by a whopping 192 percent from $3.5 billion in 2020 to almost $11 billion in 2021. Meanwhile, the Japanese yen climbed 4 percent against the US dollar.

Most European currencies are up 8 percent to 15 percent against the dollar year-on-year, while most Asia-Pacific currencies have risen 4 percent to 11 percent, according to PERE data.

The majority of US institutions, however, have moved down or remained unchanged on the GI 100 as their real estate portfolios shrank in relative value.

“In general, we saw a lot of currencies appreciate against the US dollar,” remarks Will Robson, head of real estate solutions research at New York-based index provider MSCI. “Say you’ve got euro-denominated investments, even if the value of those investments didn’t change at all, the value of those investments in US dollars went up.”

Global appreciation

Most currencies, with the exception of the South African rand, Brazilian real and Indonesian rupiah, appreciated against the US dollar in 2020, leading the size of the global real estate market to increase by 3.9 percent, according to MSCI’s Real Estate Market 2020/21 report.

Cedrik Lachance, director of research at California-based commercial real estate analytics firm Green Street, believes such currency impacts will not affect investor activity in real estate. “In general, currency movements, when they’re relatively small – and last year, they were relatively small – don’t really affect what investors do. It’s only when there are big changes over an extended period of time that it changes the perspective of the entry point,” he explains.

“It’s so complicated to figure out what’s going to happen to currencies, the most long-term oriented and capable investors just don’t play that game.”

Rather than target a handful of economies, which some investors may do in their early investments overseas, such institutions will instead invest in a country based on a benchmark allocation and then within that country, deploy money into favored cities and sectors. “It’s generally only once they’re in the country that they make big bets on segments of the property market they like,” he says.

This is not the first time that currency movements worked in European and Asian investors’ favor and at the expense of US groups. In 2015, the institutions that made the biggest gains in terms of ranking position and real estate AUM were Europe and Asia-Pacific-based investors, as non-USD denominated currencies also rallied against the dollar.

In such a currency environment, however, changes in the size of an investor’s real estate allocation typically are not indicative of actual growth in the size of the institution’s property portfolio or the group allocating more money to the asset class, according to Robson.

He also points out other potential factors that could affect an investor’s allocation to real estate without the organization deploying more capital into the asset class. “Depending on where they’re invested, some markets have just grown, so even if you didn’t increase or decrease your allocation, your allocation would have increased or decreased based on the growth of the market,” Robson explains.

That growth in allocation size could be large or small, depending on the stage of the real estate cycle and what property sectors an institution is invested in, he adds: “Last year, you’ve got ranges of capital growth from +5 percent to -10 percent. Within those, you got strong returns from industrial versus weak returns from retail.”

If an investor reports its real estate assets as net asset value – as is often the case with the GI 100 – instead of gross asset value, and values increased by 10 percent, that increase in NAV would be significantly more than 10 percent because debt is factored into calculations for the latter, Robson notes.

Understanding currency movements, he says, is important “for interpreting results and not overinterpreting the results.”

How the US dollar measures up

The strength of the dollar against other major currencies varies considerably by country but exchange rates have remained relatively constant so far this year.

Most major currencies rose against the US dollar in 2020, with the increase ranging from 1.8 percent for the Canadian dollar to 14 percent for the Swedish krona, according to MSCI’s Real Estate Market 2020/21 report.

Aside from Sweden, Australia, Switzerland, Denmark and the eurozone, countries all saw currency increases of 9 percent or above against the dollar, the MSCI data showed. Other countries in Europe or the Asia-Pacific region saw more modest increases of 6.7 percent or lower.

Exchange rates for the dollar have remained relatively consistent to date in 2021. As of September 6, $1 was equal to €0.84, with the dollar to euro exchange rate as low as €0.81 on January 7 and as high as €0.86 on August 20, according to the currency website xe.com. Meanwhile, the dollar was equal to ¥109.84 as of press time, with the dollar to yen exchange rate as low as ¥102.68 on January 2 and as high as ¥115.73 on July 2.