By Jim Costello on February 1st, 2016
A buddy of mine texted me:
Is it time to buy a place in Whistler? The Canadian dollar is falling: time to party?
This is the guy who bribed his way into East Germany to sell American blue jeans during college, so the level of advice he is always seeking from me, his more conventional economist friend, always tends towards more adventurous ideas.
Still, his question brings up the notion that U.S. investors may be tempted to look overseas for relative bargains. The U.S. dollar has appreciated 12% in the last year against a broad index of currencies of U.S. trading partners and any U.S. investment in a foreign country now looks less expensive on a price-per-pound basis. Are professional investors actually motivated by exchange rate movements over time?
Canada is actually a good model to examine this question. The Canadian property market is traditionally insular with a handful of large domestic capital sources trading prime assets back and forth and foreign investors typically constitute a small portion of total activity. Those foreign investors are typically from the U.S. as well, accounting for 75% of the cross-border buyers in Canada in 2015.
Looking at the share of deal volume in Canada since 2005 relative to the exchange rates, the results are mixed. As the Canadian dollar gained ground from 2005 to 2008, foreign investment gained ground as well. Similarly, as Canadian dollar was at parity with the U.S. dollar from 2010 to 2013, the foreign share of investment continued to grow.
Why such a disconnect? In part the issues that drive exchange rates also drive the excitement around commercial real estate investment. The Canadian dollar gained ground on the U.S. dollar in a time period when surging wealth from the oil sands in the Western Provinces was boosting the Canadian economy. That economic growth in turn drove excitement around the story of commercial real estate performance in this economy. As the Canadian dollar and economy faltered into 2015, so too did foreign interest in investing in Canada.
In this case at least, exchange rates did not seem to motivate investors to move capital into Canada. Arguably, most professional investors should not be motivated in this way. One can argue that investment managers should be rewarded for success in the pursuit of their stated strategy. If you want to reward your manager for success in predicting currency movements, there are a number of vehicles available in the credit markets.
So will the strong dollar drive an outflow of U.S. investment capital? I would argue it should not in the sense that the weaker foreign currencies are largely a sign of weaker economies and therefore commercial property investments without as much of a story. Still, it might be an excellent time for more opportunistic investors.
If one believes that the decline in energy prices is temporary and that investments in energy hubs like Houston, Calgary and Edmonton will perform in the future as the energy markets rebound, there is a case to be made to pursue opportunistic investments. Conditional on a view of a future energy market rebound, any investment in Canada completed today may well outperform moving forward. Growth in demand for the Canadian real estate from the oil rebound would be coupled with an exchange rate kicker as the Canadian dollar came back with
resumed growth in oil wealth.
That exchange rate kicker would juice the returns of unhedged investors. So for anybody who has investment objectives that are as adventurous as those of my friend (maybe not that adventurous, maybe more opportunistic), with the U.S. dollar buying C$1.3 in 2015, it may be a good time to be looking at a vacation place in Whistler.