Investors ‘need to wake up to benefits of hedging’

Real estate investors need to wake up to the benefits of hedging, according to Dirk Richolt, head of real estate finance at CBRE in Frankfurt, in a recent discussion with REFIRE.

‘Investors need to catch up with hedging and to become aware of the advantages of doing so,’ said Richolt.  ‘For example, a US buyer today buying real estate in the euro zone can make 2.2% a year on a five-year business plan, just based on the exchange rate. That’s a lot – it’s like adding 2% to the yield on the property.’

It’s also a case of ‘ne'er the twain shall meet’ due to finance and property people viewing deals through very different lenses, according to Richolt: ‘Bond traders know that you need to be hedged. Property people don’t think like this – they just look at the broad yields. Another part of the problem is that with a bond, you always know when it’s going to mature but you don’t know when a property will be disposed of.’

The fact that bond traders and property professionals tend to use different methodologies to calculate yields isn’t helping, either. ‘It’s extremely odd that bond yields are measured after taking into effect the cost of hedging while property yields typically aren’t,’ he said.

German federal bonds with terms of up to 8 years still offer negative yields, as do swap rates with terms of up to 6 years. ‘This is heaping pressure on investors to invest in real estate, which is why prices have been rising,’ Richolt said. ‘Today, real estate income is still more attractive than that offered by bonds and I don’t expect that to change any time soon.’