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1

Describe three ways an investor can invest indirectly in international property markets.

Three ways to invest ‘indirectly’ in international property markets:
1. Purchase units in a local PF that owns international properties.
2. Purchase units in a PF operating in another country (traded in another currency).
3. Purchase units in a “globalREIT” which holds interests in worldwide portfolio. Unit prices either denominated in either local or overseas currency.

2

Identify and explain the two key drivers for investing in international property markets.

Two key drivers for investing internationally:
Diversification: investing in property markets globally can provide risk reduction for investors. Research has shown that investors can achieve improved risk/return outcomes by including international properties in a mixed asset portfolio.

Enhanced returns: International investment can provide higher potential returns than are available domestically. International property investments are available across the risk-return spectrum. Enhanced returns are likely to be available in higher risk markets and funds

3

Commercial property investments can be segmented into four investment strategies. What are these four strategies and where does each sit on the risk-return spectrum?

Core: substantially rented; orderly lease expiration schedule; high quality; invest primarily in the major property types (Office, industrial, retail).

Core plus: provide investors with more opportunities to increase the rate of return but are slightly more risky.

Value Added: property investments are slightly more risky and generally seek higher IRR. Usually acquire the major property types, plus, hospitality, senior living and storage properties. Usually carry significant debt, and rely more on local knowledge than do core or core-plus investments.

Opportunity: investments are most risky, focus on non-traditional property types, including speculative development, seek high IRR, and have debt levels at more than 70% of the property value.

4

What are the five factors Jones Lang LaSalle take into account when developing the Real Estate Transparency Index?

1. Availability of investment performance indexes,
2. Market fundamentals data,
3. Listed vehicle financial disclosure & governance,
4. Regulatory & legal factors, and
5. Professional & ethical standards

5

Identify and discuss three formal barriers to international property investment.

Legal barriers: arise from different legal treatment of foreign and domestic investors. Foreign governments can often impose ownership restrictions to ensure domestic control of local firms. These restrictions can be minimised by entering in to joint ventures with local investors/funds.

Capital controls: impact on the ability of investors to repatriate their investment(s). A common restriction is the minimum period of investment. Restrictions on international financial flows are less prevalent in high-income countries with large domestic savings and more common in developing economies. Property investors consider capital restrictions to a very high barrier to investment.

Taxation: The tax regimes can very across countries. This can include, for example, tax deductibility of expenses and different tax treatments for repatriation of income and capital. Its important investors establish the appropriate ownership entity. Withholding tax is a tax on income, so called because the income is withheld from the foreign investor. In addition, withholding tax rules in Australia can vary depending on our tax treaties with different countries. The use of leverage to reduce net income (if permitted) is a way of mitigating this barrier. Employment of tax experts is used by funds when contemplating non-domestic investment. Research shows that taxation is an important barrier to investing overseas.

6

explain the formal barrier of legal

arise from different legal treatment of foreign and domestic investors. Foreign governments can often impose ownership restrictions to ensure domestic control of local firms. These restrictions can be minimised by entering in to joint ventures with local investors/funds.

7

explain formal barriers of capital controls

impact on the ability of investors to repatriate their investment(s). A common restriction is the minimum period of investment. Restrictions on international financial flows are less prevalent in high-income countries with large domestic savings and more common in developing economies. Property investors consider capital restrictions to a very high barrier to investment.

8

explain formal barriers of tacation

The tax regimes can very across countries. This can include, for example, tax deductibility of expenses and different tax treatments for repatriation of income and capital. Its important investors establish the appropriate ownership entity. Withholding tax is a tax on income, so called because the income is withheld from the foreign investor. In addition, withholding tax rules in Australia can vary depending on our tax treaties with different countries. The use of leverage to reduce net income (if permitted) is a way of mitigating this barrier. Employment of tax experts is used by funds when contemplating non-domestic investment. Research shows that taxation is an important barrier to investing overseas.

9

dentify and discuss four informal barriers to international property investment.
ANSWER:

currency risk
political risk
cultural barriers
infomation assymmetry

10

explain currency risk

a major barrier to international property investment. Because returns from overseas property investments can fluctuate widely due to changes in currency exchange rates. As much as two thirds of the returns from international property portfolio can be explained by currency movements.

However, a weakening of A$ would increase interest payments and the value of the principle on the loan.

However, the consequences of changes in exchange rates has a larger impact on the appraised value of the properties in the local currency (thus financial statements)
An Australian PF must report their values in A$ (assets & liabilities etc.)
A change in exchange rates will impact the value of their assets

11

explain political risk (informal)

the risk an investment's returns could suffer as a result of political changes or instability in a country. Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers or military control. Political risk is higher in emerging/developing economies.

12

explain cultural barriers (informal)

knowledge of the local culture is crucial to build good relationships and achieve transactions. Cultural barriers are exemplified when investors deal with assets based in countries with different religious beliefs (e.g. Shariah-law). To overcome these barriers, investors will often enter into joint ventures with a local partner and generally hire locals in the host country.

13

infomation assymetry (informal barrier)

can be a barrier when investing internationally.
Foreign assets can be more risky than domestic (even if identical) due to information asymmetries. Local investors will generally know more about an asset, the legal and tax environment and the overall market than foreign investors. To overcome foreign investors will enter into joint ventures with local investors.

14

LMB is an Australian unlisted property trust. The trust has just purchased a property in Japan for JPY5 billion. If the AUD/JPY exchange rate is 83.35 (i.e. 1 AUD is equivalent to 83.35 Japanese Yen), what value of the property in AUD would be reported in the trusts balance sheet?
Assume now that the value of the property in JPY is remained unchanged, however the AUD has depreciated against the JPY and the exchange rate is now AUD/JPY 79.96, what would be the reported value of the property in Australian Dollars?

Value of the property at purchase in Australian dollars:
JPY5 billion/83.35 = AUD59,988,002.
Value of the property after depreciation of the Australian dollar:
JPY5 billion/79.96 = AUD62,531,265

15

What is a natural hedge in relation to currency risk? How can a natural hedge minimise currency risk?

A natural hedge can be achieved by matching receipts & payments or matching assets & liabilities in the same foreign country. This can best be achieved by borrowing in the country where the property is located. This limits currency risk to the differences between:

i). The rents and loan payments, and
ii). The property value and loan value

16

What is a forward currency agreement (contract)? How can such a product be used to reduce currency risk?

A forward currency agreement is a contract that gives the holder the right and the obligation to buy or sell a currency at some point in the future at a price agreed upon today. It provides flexibility for the holder over a currency futures contract in that the buyer can negotiate terms with their counterparty.

A forward currency agreement can reduce currency risk because the holder is able to ‘lock in’ the exchange rate today for delivery (maturity) in the future. The result is that a property fund is able to protect their cash flow from another country against changes in the exchange rate.

17

BigOz is an Australian REIT and have property investments in Canada. They are anticipating to repatriate 600,000 Canadian dollars (CAD) from net rental income in three months’ time. BigOz are concerned about currency fluctuations between now and then. They contact AGG Bank for a quote on a three-month forward currency contract. The Bank quotes BigOz a spot rate of AUD/CAD1.0075 and the three-month forward points are -22 points. What would be the three-month forward exchange rate for BigOz? How much, in Australian dollars, will they repatriate if they go ahead with the forward currency contract?

Three-month forward exchange rate = spot rate plus or minus the forward points.
In this case the three-month forward exchange rate = 1.0075 – 0.0022 = 1.0053.
Repatriated value in Australian dollars = CAD600,000/1.0053 = AUD596,837.