A majority of property investors (71 percent) have a currency hedging strategy in place, with more than half of these (52 percent) hedging US dollars, according to research from the European Association for Investors in Non-Listed Real Estate Vehicles (INREV), and academics at Western Sydney University.
Forty percent of investors surveyed by the trade organization hedged UK sterling, 28 percent Japanese Yen, 28 percent Australian dollars and 16 percent Euros. All foreign currencies were hedged by 32 percent of the investors polled.
The preferred hedging instrument was forwards, which are used by 57 percent of investors.
Commenting on the research, Henri Vuong, INREV’s director of research and market information, said: “It’s abundantly clear from this study that investors adopt a highly sophisticated approach to currency hedging and see it as a major part of the risk management framework for managing their exposure to international real estate.”
The research also looked in to the impact of currency on the performance of European funds and analyzed returns data between 2001 and 2015, providing a long time series. It revealed that funds that use currency hedging strategies have experienced a reduction in risk of between 25 percent and 36 percent compared with unhedged funds.
Data was gathered from the INREV Annual Index and the analysis focused on four sample portfolios: sterling invested in Europe ex-UK real estate; US dollars invested in European real estate; euros invested in UK real estate; US dollars invested in UK real estate.
This research shows that the optimal hedging ratio is likely to be somewhere in the range of 50 percent to 100 percent. Forward-looking analysis also suggested that the optimal ratio was 81 percent.
“It’s also clear that fund managers of non-listed real estate funds need to factor currency movements into their thinking – it could make the difference between retaining or losing clients,” added Vuong.