An uptick in FX hedging, locking in low interest rates and good opportunities to refinance.
Foreign exchange risk remains high on the agenda of our real estate clients. This includes transaction and translation risk, which arise from currency shifts. Those with euro-denominated funds have to make particularly challenging FX hedging decisions for their GBP investments. The interest rate differential between the two currencies means that the cost of hedging becomes a more prominent factor when deciding on the optimal strategy. Credit availability and liquidity requirements are other important factors to consider.
Interest rate hedging is typically transaction driven and across Europe we have seen lower activity as geopolitical risks and historically low yields seem deter investment. However, the recent reduction in interest rate expectations again, has provided an opportunity to lock-in these low interest rates levels. As a result we have seen a number of clients increasing their hedging proportions and, in some cases, replacing option based instruments, such as caps and/or swaptions, with more certain strategies like fixed rate swaps and fixed rate debt.
We saw a decrease in UK transaction activity for new lending over the past year, but there was an increase in lending to ‘Operating Assets’, reflecting the continued appetite for these alternative real estate assets. There have also been high levels of refinancing as our clients try to achieve certainty of debt funding on a five to seven year horizon and remove refinancing risk.