Perspective

How will US dollar strength affect APAC property markets?


US dollar strength has two key implications for APAC real estate, which work in different directions. The first is an increase in uncertainty and perceptions of risk affecting markets including Japan, Mainland China and emerging markets, which may deter investment. The second is an increase at the margin in the purchasing power of investors based in the US and other markets with US dollar pegs (notably the Middle East), which may encourage investment. On balance, we think dollar strength will boost property investment volumes in the region, but this is by no means certain.

Appreciation of USD against APAC currencies has accelerated in 2022

The US dollar has been strengthening against many APAC currencies since about 2012. This may seem surprising, given that aggregate real GDP growth in APAC has exceeded the US in each year over the past decade. However, the appreciation of the US dollar since 2012 represents a reversal of several years of depreciation against various APAC currencies during and after the Global Financial Crisis (GFC) of 2008-2009.

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The pace of US dollar appreciation– or, stated inversely, the pace of depreciation of APAC currencies – has accelerated sharply over 2022. This applies to both developed and emerging market currencies. The most extreme case is the Japanese yen. As of 20 October, the yen had fallen 27% from its average rate versus the USD over 2021 to a 32-year low of 150, although it has since recovered slightly to 146. Other APAC currencies which have weakened significantly against the US dollar this year include the Korean won, the Australian dollar and the Thai baht.

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Weakening APAC currencies increase uncertainty and perceptions of risk

What are the consequences of depreciation of APAC currencies? Investors with long memories will remember the Asian Financial Crisis of 1997-1998. This began when Thailand unpegged the Thai baht from the US dollar, setting off a series of currency devaluations and huge flights of capital. Within six months, the South Korean won fell by nearly 50% against the US dollar, the Thai baht fell by more than 50%, and the Indonesian rupiah collapsed by 80%.1

Opinions about the Asian Financial Crisis vary widely. Frequently cited causes include weak banking systems, real estate bubbles in various markets prior to the crisis, and the allegedly close relationships between the state and business that were a feature of East Asian development at the time. Emerging markets in Asia and other regions have generally reinforced their financial systems over the quarter-century since 1997, and most emerging market central banks now have sufficient foreign exchange reserves to avoid old-fashioned currency crises.2

However, one lesson from the Asian Financial Crisis is still very relevant today. At the time, Indonesia in particular had a major problem with large companies that had been borrowing in US dollars. This practice had worked well while the Indonesian rupiah was strengthening, but once the rupiah started to plunge these companies’ debt levels and financing costs exploded in local currency terms.

This problem has parallels with the recent experience of Evergrande and other large Chinese residential property developers, which borrowed extensively in US dollars during the long period after the GFC when US interest rates were very low. In the Chinese case, the domestic residential market turned down sharply not long before US interest rates started rising again and the US dollar started to strengthen appreciably against the Chinese renminbi. This meant that the companies’ debt burdens started to become unsustainable. The predictable result has been a wave of defaults over the past year by financially overstretched developers.

One might suppose that the financial problems of Chinese residential developers should not, in themselves, directly affect commercial property valuations. However, there can be little doubt that the problems in public equity and bond markets have increased perceptions of risk in private real asset markets. The perceived higher level of risk helps explain why investment property transactions fell by 25% y-o-y in China over the first nine months of 2022 (and by 36% in Q3).3 It also helps explain one broker’s forecast that cap rates will expand over the next six months for most Chinese commercial property asset types except logistics, despite the downward trend in Chinese interest rates this year.4

Currently, the APAC market most exposed to greater uncertainty as a result of currency weakness may well be Japan. It is easy to state that Japanese assets are cheap in US dollar terms after the yen’s steep fall this year, but investors may be deterred from buying either by fears that the yen will fall still further, or by high hedging costs. The yen’s small rebound against the US dollar towards the end of October does not offer sufficient evidence that the currency has found a floor.

At this point, we should highlight that the Japanese yen’s sharp depreciation against the US dollar this year results largely from the wide interest rate differential between the two countries. The yen’s weakness does not primarily reflect either serious economic problems or political crisis (which was the key cause of the recent sharp fall in the value of the British pound). Schroders expects the yen to recover gradually against the US dollar over 2023 as the US Federal Reserve pivots from raising to cutting interest rates in the face of forecast recessions in the US and Europe.5

Emerging markets in general are also exposed to high uncertainty. If their currencies weaken further against the US dollar, central banks in certain Asian emerging markets may have to implement interest rate hikes or possibly capital controls to stem capital outflows. In Europe, the National Bank of Hungary has been forced to implement “emergency” rate hikes within the past few weeks. Countries in Asia with fragile balance of payments positions which may conceivably find themselves in this position include India, Thailand and the Philippines.6

Strong USD boosts buying power of investors based in the US and Middle East

Looking at investment into property by all investors including funds, over the past ten years, domestic capital has made up 65[(-80) was not found] of aggregate commercial property investment transactions in APAC. Cross-border capital flows have made up the remainder. For the past 15 years, the two biggest sources of cross-border capital flows in APAC have been investors based in North America (consisting mainly of US, but also Canadian investment funds and institutions) and investors based in Singapore and Hong Kong SAR7 (consisting mainly of investment funds and property developers).8

Remarkably, investment in APAC real estate markets by North American investors has still not surpassed the USD27.8 billion record set in 2007. That year featured not only a boom in Chinese financial markets, but also economic strength across the region, with aggregate APAC real GDP growth of 7.5%. Investment by North American capital collapsed in 2008 and 2009 during the Global Financial Crisis, and remained well below the 2007 level for years afterwards.

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From about 2014, investment in APAC real estate by North American capital recovered gradually, reaching a high point of USD26.8 billion in 2019 before dipping again during Covid-19. We think the primary driver of this recovery was diversification of capital into a region achieving higher economic growth than the US, and where US investors were under-allocated compared to their home market and Europe. This makes intuitive sense, and it is consistent with work by our European research team which suggests that there has been a significant correlation between Eurozone GDP and the change in inward investment into property. In other words, international investors appear to respond to the same signals as domestic investors.9

Another, very important factor behind the recovery in North American investment in APAC was, of course, prolonged quantitative easing in the US and other markets. This helped North American investors to borrow at very low interest rates to finance investment both at home and in other regions.

However, at the margin steady US dollar appreciation against APAC currencies from 2012 onwards may have increased the purchasing power of North American investors in the region, and thus enhanced their ability to acquire APAC real estate assets. Will the renewed – and more rapid – USD appreciation seen over 2022 have the same impact?

In the near term, we suspect that the answer is no. Many western institutions have been deterred from further investment in Mainland China and Hong Kong SAR by geopolitical issues. Many of them are still increasing allocations to APAC, but the concerns about Mainland China and Hong Kong SAR are pushing interest to other markets such as Japan, Singapore, South Korea and Australia. In addition, some investors are exploring allocation of capital to new markets like Vietnam and India. However, against a background of sharply rising interest rates and tough economic conditions, large western investors are not necessarily in a hurry to meet their targets for APAC capital allocation. As Figure 3 shows, investment by North American capital in APAC so far in 2022 has reached just USD11.5 billion – less than one-half of the total for 2021. European investors have committed just USD3.8 billion to the region so far this year.

The above said, if US dollar strength persists, US investment institutions may start to accelerate their allocation plans for APAC. Certain big US investors have remained active in APAC so far this year despite the sharp overall drop in North American investment in the region. These investors include Blackstone, the second most active cross-border player in APAC property markets over H1 2022 after GIC of Singapore, with KKR and AEW also ranked among the top ten.10 Perhaps these investors will increase their activity next year, with other funds joining them. We expect that the top target for US and other western investors in APAC will be Japan, whose attractions as an investment destination are enhanced by the continued very low cost of financing.

New investment demand in APAC may also come from a related source: the Middle East. The world’s biggest grouping of countries with long-established US dollar pegs consists of five of the six nations of the Gulf Cooperation Council: Saudi Arabia, the United Arab Emirates (UAE), Qatar, Oman and Bahrain. Three of these nations (Saudi Arabia, the UAE and Qatar) are also home to large sovereign wealth funds. Kuwait, the sixth nation of the GCC, also has a large sovereign wealth fund, but the Kuwaiti dollar is pegged to a basket of currencies rather than the US dollar.

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With ample financial resources underpinned by high energy prices, we expect Middle Eastern investors to become more active in APAC. Direct purchases of APAC property by Middle Eastern capital reached USD630 million in 2021, and the year-to-date figure for 2022 exceeds USD840 million.11 These totals understate the importance of Middle Eastern groups, because some invest either through large funds with multiple investors, or through development vehicles.

As an afterword, Hong Kong SAR also has a US dollar peg, which the Hong Kong Monetary Authority has supported this year at the cost of some diminution of the territory’s foreign exchange reserves. Hong Kong-based investment funds have traditionally preferred to invest in the US, the UK or Australia than in Asia, and US dollar strength means they are well-placed to continue doing so.

However, in an APAC context, cross-border investment by Hong Kong capital also includes purchases by the territory’s large property developers, which historically have shown a preference for Mainland China. For now, property investment volumes in Mainland China are falling, and are unlikely to recover rapidly. If the US dollar is still strong when volumes start to rebound, at the margin Hong Kong investors should enjoy stronger buying power in the Mainland market.


1 See https://www.britannica.com/event/Asian-financial-crisis

2 See Schroders’ report, What else can EM central banks do to protect their currencies? (25 October, 2022)

3 Source: MSCI Real Capital Analytics (RCA) database (27 October, 2022).

4 See, e.g., CBRE, Asia Pacific Cap Rate Survey Q3 2022

5 See Schroders’ reports Forget soft landings – how much of a recession is needed to tame inflation? (9 August, 2022) and Economic and Strategy Viewpoint Q3 2022.

6 See Schroders’ report, What else can EM central banks do to protect their currencies? (25 October, 2022)

7 SAR = Special Administrative Region [of the People’s Republic of China]

8 Principal source for data on investment and capital flows: MSCI RCA

9 Source: Schroders Capital (October 2022)

10 Source: MSCI RCA Regional Trends Asia Pacific Q2 2022 presentation (August 2022)

11 Source: MSCI RCA (October 2022) MSCI

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