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Hedging Private International Real Estate

Robert Johnson, Colin Lizieri (), Luc Soenen and Elaine Worzala ()
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Robert Johnson: Department of Economics, University of San Diego
Luc Soenen: California Polytechnic State University

Real Estate & Planning Working Papers from Henley Business School, Reading University

Abstract: The performance of an international real estate investment can be critically affected by currency fluctuations. While survey work suggests large international investors with multi-asset portfolios tend to hedge their overall currency exposure at portfolio level, smaller and specialist investors are more likely to hedge individual investments and face considerable specific risk. This presents particular problems in direct real estate investment due to the lengthy holding period. Prior research investigating the issue relies on ex post portfolio measure, understating the risk faced. This paper examines individual risk using a forward-looking simulation approach to model uncertain cashflow. The results suggest that a US investor can greatly reduce the downside currency risk inherent in UK real estate by using a swap structure - but at the expense of dampening upside potential.

Keywords: International Real Estate; Investment; Hedging; Currency Derivative Markets (search for similar items in EconPapers)
Pages: 23 pages
Date: 2005
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