The significance of foreign exchange risk in the international real estate securities investment

Abstract

Traditionally, international real estate investments are mainly conducted through direct investments in foreign properties. Due to the recent securitization and globalization trends in the real estate capital markets, the international real estate securities investment has been growing fast and gaining more popularity than the direct real estate investment because of its absence of the portfolio management and monitoring problems. Foreign exchange risk exposure is inevitable for the international investments. To minimize the foreign exchange risk and hedge investment returns, investors have been spending a huge amount of time and money on developing and implementing currency hedging strategies without paying enough attention on studying and testing the significance of the foreign exchange risk. Since there is no doubt about the existence of the foreign exchange risk, the importance of studying foreign exchange risk is to avoid unnecessary hedging costs. By forming 6 study questions, applying the international real estate securities market indexes & U.S. financial market data, structuring Arbitrage Pricing Models, and performing hypothesis testing for 13 countries and 3 regions, the thesis studied the significance of foreign exchange risk in international real estate securities investment from different angles, including: 1. Is the foreign exchange risk significant across time? 2. Does the significance of foreign exchange risk change across time? 3. Is the foreign exchange risk significant on an equally weighted portfolio basis? 4. Does the significance of foreign exchange risk change across time on an equally weighted portfolio basis? 5. Is the foreign exchange risk significant on an optimally weighted portfolio basis? 6. Does the significance of foreign exchange risk change across time on an optimally weighted portfolio basis?