Staying Current on Currency Conflicts
The growing potential for counterproductive global currency conflicts was a key point of discussion for economists and policy makers at this past weekend’s annual meeting of the World Bank and International Monetary Fund, held in Washington, D.C. Here at home, mixed signals about the strength of unilateral policy moves–and some grandstanding in Congress–has allowed the greenback to fall to its lowest in 15 years against the yen, weighed down by a weak domestic growth outlook, the potential for further easing of monetary policy and the threat of competitive devaluation.
Many commercial real estate market participants have welcomed the decline in the dollar, even if they would rather see the greenback fall against the renminbi as opposed to the yen and the euro. But the conventional wisdom that a lower U.S. dollar will attract greater foreign inflows misses the dynamic relationship between the underlying drivers of space demand, the attractiveness of the real estate assets and, separate from the real estate market altogether, the complexity of competitive activity in global currency markets.
Unilateral currency moves by any economy can be destabilizing, both economically and politically. Over the weekend, Canada’s finance minister, Jim Flaherty, described the increasing attention to exchange rate interventions as “lead[ing] to a crescendo of activities which are protectionist.” He reminded his colleagues that “… currency disputes can easily become trade disputes.”
In an effort to ensure a coordinated approach to currency rebalancing rather than one driven to a greater extent by political forces, the Institute of International Finance, which represents more than 400 global financial institutions and which also met this past weekend, commented on the currency issue earlier this month:
“As countries struggle to cope individually with the lack of upward momentum in global growth–and in many cases unacceptably high unemployment–urgent action is needed to arrest the disturbing trend towards unilateral moves on macroeconomic, trade, and currency issues … The US legislative initiative to authorize the imposition of remedial tariffs for material currency undervaluation–accompanied by possible deterrents to activities such as outsourcing–also demonstrates the essentially counterproductive nature of unilateral policy action.”
AND SO, WITH the temperatures rising among countries making forays into the currency debate, the I.M.F. has sought to mediate the issue. Egypt’s finance minister and the head of the I.M.F. policy steering committee, Youssef Boutros-Ghali, stated that “the exchange rate issue will be on the agenda, but, typically, it will not be on the public agenda. These are issues that you solve quietly in closed rooms. … The exchange rate is one symptom of a deeper problem.”
We are aghast at Mr. Boutros-Ghali’s suggestion that this issue cannot benefit from sunshine. But we also concede that in the political arena, carefully chosen public words may afford greater conciliation among publicly-proud governments.
Striking that conciliatory note, World Bank President Robert Zoellick stated that “I don’t foresee that we’re moving into an era of global currency wars but there are clearly going to be tensions.”
The pressures to appear forceful on these issues are enormous. While not mentioning China by name, Treasury Secretary Timothy Geithner, speaking at the weekend conference, stated that “… it is critical to see more progress by the major emerging economies to more flexible, more market-oriented exchange rate management. This is particularly important for those countries whose currencies are significantly undervalued. … Countries that chronically run large trade surpluses need to undertake policies that will boost their domestic demand. …”
Economists will generally support the idea of free-floating exchange rates and the conceptual underpinnings of Mr. Geithner’s position. In its most recent World Economic Outlook, released last week, the I.M.F. stated that “… if domestic overheating is influenced by strong capital flows, monetary tightening should be accompanied by currency appreciation to help offset inflation pressure, discourage speculative inflows and support medium-term rebalancing.”
At least in public, Mr. Geithner’s message does not resonate with the Chinese government. China’s central bank governor, Zhou Xiaochuan, stated in Washington last week that “China’s exchange-rate policy is based on the market supply-and-demand relation to move gradually to the equilibrium point. …”
Turning the issue back to the United States and Europe and reframing the growth argument in terms of questionable fiscal and monetary policy in the West, he stated further that “sovereign risks could deteriorate again at any time, producing systemic effects on the global financial stability.”
The greatest drags on global recovery do not relate to managed currency markets, but include “the slow progress of developed countries in repairing and reforming their financial systems, and the continued reliance on policy support for the stability of the financial sector.”
What a strange time, when the Chinese government can cite the United States government for its active management of the economy.
Foreign Buyers in the New York City Marketplace
Currency issues matter for cities that attract global capital to their real estate markets. In New York and in a handful of other U.S. metros, the data does not support a definitive conclusion as to the impact of adjustments in currencies– short- or long-term, expected or unexpected–on foreign capital inflows. The data does, however, show that foreign buyers are a distinctive feature of the U.S. buyer landscape.
Foreign acquisitions of U.S. commercial real estate have been widely touted as one of the keys to the sector’s investment recovery. Much of the anticipation around foreign buyers has related to the potential for reform of the 1980 Foreign Investment in Real Property Tax Act (FIRPTA). While foreign investment will undoubtedly rise in the event of meaningful FIRPTA reform, the promise of tax code changes does not explain the tailwinds already supporting foreign buyers’ attention to the U.S. marketplace.
As reported by Real Capital in our recent update on foreign capital flows, rising U.S. investment contrasts with global cross-border flows that have declined dramatically from 2007/2008 to 2009/2010, as investors have adopted more risk-averse strategies and retreated from the global stage.
In Western Europe, cross-border transaction activity has fallen from almost 60 percent of volume to just over 35 percent during this period. In Latin America, cross-border activity has fallen even more dramatically, from over two-thirds of volume to a little more than 10 percent.
In fact, the United States and the United Kingdom are the only major countries that have experienced a rise in property acquisitions by cross-border investors over this period.
Driving Liquidity Improvements in Gateway Metros
Taking advantage of prices that remain near their cyclical lows, foreign investors have focused their attention on markets that historically have commanded the strongest interest for cross-border investment. While foreign buyers have grown their share of national transaction volume to approximately 10 percent in 2010, up from less than 7.5 percent in 2009, the increase in market share in those historic target markets–including Boston, Washington, Los Angeles, Manhattan and San Francisco–has been much larger.
Through June, foreign buyers had accounted for nearly one in every five acquisition dollars spent in these favored metros.
Reflecting a long-standing bias in favor of prominent office properties within their target markets, foreign buyers have played a leading role in driving liquidity to that sector, often crowding out domestic investors. Year-to-date, office acquisitions have accounted for 61 percent of foreign acquisition investment volume. And so while accounting for nearly 20 percent of acquisition dollars across all property types in the nation’s “gateway” markets, foreign buyers have accounted for nearly one-third of office transaction volume in these same locations, making a disproportionate contribution to liquidity and price discovery for high-quality assets in this sector.
In contrast with the office sector, acquisitions of industrial properties have withered over the past 18 months and represent just 2 percent of foreign investment volume in 2010.
Movements in currency markets can be as much about global politics as economics. And so commercial real estate investors evaluating opportunities in the U.S. may be disinclined to develop complex hedging strategies.
It remains unclear how a pending currency battle between the United States and China, in particular, will impact Chinese acquisition activity in the U.S. market. To the extent that global economic stability can be upset by protectionist moves on either side, domestic investors should place their bets with multilateral approaches that limit the potential for Pyrrhic victories.
Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.