Author: Alan J. Ziobrowski and James W. Boyd

Start Page: 33
End Page: 58
Volume: 7
Issue Number: 1
Year: 1992
Publication: Journal of Real Estate Research

Abstract: Despite the large-scale purchase of U.S. real estate by foreign investors, empirical evidence has recently been offered that suggests that such investments may not be efficient for portfolio optimization. From the foreign perspective, free-floating exchange rates appear to introduce a level of risk to U.S. real estate assets that overrides any potential diversification benefits.  For many years, corporate managers have borrowed in the home-country currency of their foreign assets to limit exchange risk exposure. This study investigates this strategy by examining the utility of U.S. dollar-denominated leverage to foreign investors in U.S. real estate. Specifically, efficient frontiers are constructed for British and Japanese investors to estimate the diversification gains available from including dollar-leveraged U.S. real estate in their respective investment portfolios.