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from investment overseas.The top five overseas property investors by property value of overseasinvestment are Hammerson, MEPC, Slough Estates, Brixton Estates and BritishLand. Their international property composition is illustrated in Figure 1. Other
property companies which maintain property assets overseas have less than 5per cent of their portfolio abroad, usually consisting of a single property assetin Europe, North America or Australia.
Since they began to float in 1971, currencies have fluctuated sharply. This cancause large gains or losses if the risks are not avoided by hedging or exchangerate management. The two principal risks to consider for a UK propertycompany are the effect of changing exchange rates on value of overseasproperty assets and the effect on the profit-and-loss account when rentalincomes are converted to sterling in the year-end accounts.The volatility of exchange rates can be seen by the comparison of exchangerates over time as illustrated by the American Dollar/Sterling exchange rate
illustrated in Figure 2. This clearly shows the changes due to the sterling
UK 72 per cent
Australia 6 per cent
North America 13 per cent
Europe 9 per cent
Source : Latest published accounts
Figure 1.
Top Five UK Property
Companies: Property
Assets by Country
Journal of
Property
Finance
5,4
58
revaluation in 1967 and the volatility of exchange rates since the collapse of the
Bretton Woods agreement in 1971.
Various instruments are available for exchange-rate hedging by UK
companies. Since property is usually held as a long-term investment and
hedging instruments are held for much shorter periods, the ability to hedge aninvestment in property into the future is often difficult to achieve within one hedging transaction. This has led to the introduction of tailor-made hedginginstruments, available from financial institutions.
The main aims of hedging are to match assets with liabilities avoiding anylosses due to exchange-rate movements. Traditional hedging methods includeforeign exchange contracts, option contracts; swap contracts and othercurrency management methods involve back-to-back or overseas loans.
In a forward or futures contract, all terms for exchange are arranged in
advance of the date of delivery. A forward or futures contract is a commitmentto purchase or deliver a specified quantity of currency on a specified date at aprice known when the contract is negotiated. Forward contracts are privatelynegotiated, customized transactions. The current or spot price is used after adjustment for differences between interest rates for the two currencies.
Forwards are useful for hedging specific amounts of currencies but they are not negotiable and therefore may lack flexibility.
Futures contracts allow participants to buy or sell on a public exchange
where they are traded with detailed knowledge of the characteristics of thecontract. They mirror the behaviour of the spot prices but are executed at themargin. This means only a small proportion of the cost has to be paid in
Figure 2.
US$/GB£ Exchange
Rate
US$3.0/GB£
Source : Datastream
1965
January
US$2.5/GB£
US$2.0/GB£
US$1.5/GB£
US$1.0/GB£
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
Exchange-rate
Hedging
Techniques
59
advance and subsequent move