Rising U.S. interest rates and the volatility of the dollar against the yen and the won are making it tough for Japanese and Korean investors to buy U.S. commercial real estate assets with worthwhile returns, CBRE reports.

These macroeconomic trends have driven up the cost of hedging against dollar depreciation over the past year for investors from Japan and South Korea. A yen investor now faces hedging costs to about 2.8%/year, while a won investor faces hedging costs of about 1.9%/year.

Hedging costs for yen investors had been lower than 1% for most of this decade, but costs began rising above that level in late 2015. For won investors, hedging costs have been less than 1% for about five years, but started rising suddenly in late 2017.

For a property with a cap rate around 5%, hedging costs would thus eat up about half of its cash-on-cash yield, CBRE Global Chief Economist Richard Barkham said. Barkham, along with Senior Research Analyst Taylor Jacoby, compiled the report.

Investors from those countries have taken note and are shying away from U.S. commercial property plays. In Q1 2018, according to CBRE data, South Korean investment in U.S. commercial real estate totaled just $90M, compared to $498M in Q1 2017. Japanese investment fell to just $51M from $1.2B.

Though investment from these countries has been discouraged by hedging costs, there is still interest in U.S. assets among Japanese and Korean investors. The focus, however, seems to be shifting from core product in gateway markets, which tend to have lower cap rates, to secondary markets, where yields are higher, the report said.

For instance, Samsung Life Insurance recently took advantage of the fact that  HNA Property Holdings is eager to sell some of its assets by acquiring the 1.6M SF City Center in Downtown Minneapolis for $320M. For Samsung, the Twin Cities is a new market.