U.S. Inbound & Outbound Investment Trends Snapshot | H1 2018

October 22, 2018

Capital Surplus For U.S. Commercial Real Estate

More capital crossed U.S. borders in both directions during H1 2018, with foreign inflow up by 29% from H1 2017 and U.S. outflow up by 15%. On net, the U.S. commercial real estate market had a capital surplus of roughly $12 billion. Savvy foreign investors have several strategies to mitigate foreign exchange risk when acquiring U.S. assets, one of which is purchasing forward contracts to hedge against U.S. dollar depreciation.

French company Unibail-Rodamco’s acquisition of Westfield, which included a $7.7 billion shopping mall portfolio, elevated inbound capital flows from REITs and France, as well as foreign retail acquisitions, to record highs.

Inbound and Outbound U.S. Capital Flows

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Global Investment Trends

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Hedging Costs

The cost of hedging against U.S. dollar depreciation is rising worldwide, reducing effective yields for many foreign investors, despite the continuing attractiveness of the U.S. market in growth and liquidity terms. Inbound capital flows have eased in the past 24 months, providing more opportunities for domestic investors.

Annual Cost of Hedging Against US$ Depreciation

Hedging against currency risk is not always a drag on IRR. For every currency pair, the cost of capital flowing in one direction is a gain for capital flowing the opposite direction.

Annual Impact by Currency Pair

^{*Direction of arrow represents buyers’ home currency. Arrow point is the currency in which the asset is denominated. For example, euro investors wishing to hedge against FX risk must factor in an additional cost (+) of 3.3% when purchasing dollar-denominated real estate, while US$ investors gain (-) an extra 3.3% return when purchasing euro-denominated real estate.

Note: Chatham Financial provided all hedging-cost data used in this report.}

Origins & Destinations

Inbound Capital to U.S. (includes all property types)

Highest Outbound Capital from the U.S. (includes all property types)

High-Growth Markets

Higher hedging costs are fueling increased interest in secondary and tertiary markets where yields are higher. Supply, pricing, demographic shifts and other factors also weigh heavily in market selections.