What currency risks affect long-term asset performance and exit value?

Currency risks can significantly affect the long-term performance and exit value of industrial land investments, especially for foreign investors. These risks arise due to fluctuations in the exchange rate between the investor’s home currency and the local currency (e.g., Indian Rupee, INR). Since industrial real estate is typically a long-term, rupee-denominated asset, any adverse currency movement can erode returns when converting profits or exit proceeds into foreign currency. Below are five key currency-related risks that impact asset performance:

1. Exchange Rate Volatility and Return Erosion

• Over multi-year holding periods, fluctuations in the INR against major currencies like USD, EUR, or GBP can diminish repatriated profits.
  
• Even if the asset generates stable rupee income (rent or sale proceeds), a depreciating INR reduces the foreign currency-equivalent return.
  
• This affects Net IRR and exit multiples, especially when unhedged.

2. Timing Mismatch Between Earnings and Repatriation

• Industrial land projects often involve long gestation periods and deferred exits.
  
• If the currency depreciates significantly between the initial investment and the final repatriation, the loss is amplified.
  
• Timing mismatches between lease inflows and dividend distributions may result in exchange losses during high volatility periods.

3. Debt Servicing and Capital Structuring Risks

• If a project uses foreign-denominated loans (e.g., ECBs) while revenues are in INR, currency mismatch may affect:
  
  • Debt coverage ratios
    
  • Loan repayment ability
    
  • Refinancing eligibility
    
• This exposes the project to foreign exchange risk unless hedged or matched with foreign income streams (e.g., from export-oriented tenants).

4. Impact on Exit Valuation and Buyer Appetite

• A weaker INR at the time of exit reduces the realized value in foreign currency for:
  
  • Foreign JV partners exiting through share sale
    
  • Cross-border asset sales to global investors
    
• Buyers may discount asset valuation or demand FX buffers if the currency outlook is unstable.
  
• This can shrink buyer pools or delay monetization in unfavorable currency cycles.

5. Hedging Cost and Availability

• Currency risk can be mitigated through forwards, options, or swaps, but these come at a cost.
  
• For long-term exposures (5–10 years), hedging premiums may become expensive or impractical.
  
• In some cases, hedging instruments are not easily accessible for real estate-linked returns, especially on dividend or capital repatriation.