A ‘double-decker plus’ investment opportunity in Greek real estate
A double decker investment refers to investing in a particular country, usually an emerging market, to generate a high return with a currency overlay to enjoy extra return from high interest rates. Double-decker funds buy an underlying asset, for example European high-yield debt, and then swap the income flows into a currency with high interest rates such as the Turkish lira. Investors gain if the underlying asset performs well and the income they receive from the high interest currency. Further gains are realised if the currency appreciates.
This investment strategy can generate high returns. It is not without risks though as the depreciation of the real in Brazil illustrated back in 2011. The turbulence in Turkey is another reminder of the risks to investors from searching for higher returns and introducing currency risk into their portfolio. A recent article by the Financial Times (FT) highlighted the heavy losses ( around 50%) Japanese investors suffered through such double decker funds in Turkey as they were caught out in the devaluation of the lira. According to the FT article Amundi’s European high-yield bond fund, with a Turkish lira wrapper, was down by 33 per cent over the year. The Turkey Bond Open fund from Daiwa Securities lost 51 per cent over the same period. Double decker funds in emerging markets can generate significant income; however, the currency overlay can result in heavy losses. There are growing concerns about the risks associated with these products and whether investors have a good understanding of them.
Briefly, that is the picture of a double decker strategy in the broader investment spectrum. There are useful extensions to this strategy though. For portfolio diversification purposes a double decker investment approach can offer investors from countries with vulnerable currencies valuable options. A situation in which the search for high yield is accompanied by a currency overlay with the aim of bringing stability to the portfolio makes sense. A typical case of such strategy is real estate investing in Greece at this time. A number of investors implicitly operate such a strategy. The Greek real estate market attracts a range of investors seeking high yields and expecting to profit from upside risks. The currency overlay, in this case investment in euros, will not generate the high returns anticipated from investment in emerging market currencies. After all the Greek government bond market is a special situations market right now with risks embedded in it.
However, the strategy will provide cushion to the investor’s portfolio from volatile home currencies. Extra returns can be generated from a value add strategy, what we have termed a double-decker plus approach to investing in real estate. This strategy will not generate the appealing monthly cash flow that the prototype double decker funds aims at. As any investment in real estate it is of more long-term nature. However, the cash flow from real estate can be channelled to more liquid investments in euro-denominated investment grade assets not in quest of high return but for the additional low risk return. A strategy worth considering especially for equity investors.
Kappasigma Partners viewpoint - August 2018
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