The document discusses currency risk for US dollar-based real estate investors in Latin America. It finds that: 1) Currencies in the region have depreciated significantly against the US dollar this year, improving purchasing power for US investors. 2) Currency risk is reduced as currencies like the Brazilian real that were previously overvalued have moved closer to fair value. 3) Holding real estate assets in a basket of Latin American countries provides diversification benefits, as the currencies do not move in perfect tandem and have correlations below 1.

1. The recent sell-off of Latin American currencies presents
an interesting opportunity for the US dollar-based real
estate investor in the region. Year to date, currencies
in Brazil, Colombia, and Peru have all depreciated by
a significant amount and in the specific case of Brazil,
the real has lost 1/3 of its value since April 2011. For
the dollar-based investor however, the weakening
currencies increase the purchasing power of assets in
local economies. Furthermore, future currency risk in
our view is somewhat minimized as currencies such as
the real have moved from a position of overvaluation to
a fairer value. Given that the real is no longer viewed as
one of the most expensive currencies in the world, the
risk of a major depreciation is lessened, if not already
in the rear-view mirror. Meanwhile, the US dollar-based
investor can acquire an asset at a substantial discount,
compared to 2010-11, when currencies in the region were
expensive and there was perhaps excessive froth in the
financial markets of certain countries in the region.
In this note, we discuss the topic of currency from the
perspective of the real
estate investor in the
region. Currency risk
is frequently cited as
an important factor
when considering a
real estate investment
in Latin America.
Over the past half
decade, returns for
foreign investments allocated to Latin America have
been enhanced by the appreciation of currencies such
as the Brazilian real, the Colombian peso, the Chilean
peso, and the Peruvian sol. For example, an investment
in Brazilian real estate would have added an annual
internal rate of return (IRR) of 7.5% from currency alone
if the investment had been made on the last day of 2008
and exited exactly three years later.1
Currencies in Latin
America have benefited over the past several years
from a combination of a number of factors, namely: 1)
Favorable terms of trade (reflecting stronger prices for
Latin American exports relative to its imports), as the
prices of a multitude of key commodities for the region,
such as oil, soybeans, iron ore, copper, gold, and others
enjoyed multi-year rallies and in many cases reached
all-time highs, thanks in part to robust demand from
China; 2) Easy monetary policy in the developed world,
led by the U.S. Federal Reserve’s quantitative easing
program. With interest rates at or near zero in the G-3,
capital shifted to those countries where “carry” could
be earned, i.e., the higher yielding currencies of Latin
America.2
3) A positive economic growth differential
between LatinAmerica and much of the rest of the world,
especially developed countries; 4) Improved economic
fundamentals in the region, as inflation rates fell, fiscal
deficits were reduced, and governments for the most
part adopted relatively market friendly policies.
However, the tides have turned somewhat in recent
months. Terms of trade for LatinAmerica are no longer as
favorable. Interest rates in the developed world, namely
the United States, have been rising, which presumably
will attract capital back into the U.S. and away from Latin
American markets. Due to these developments, growth
in Latin America is slowing, suggesting that the region’s
PAGE 1
Diversification benefits at play, with less volatility than might be expected
THE IMPORTANCE OF CURRENCY TO
LATIN AMERICA REAL ESTATE INVESTORS
1 Based on data provided by Bloomberg, the real ended 2008 at 2.31 versus the US dollar, and finished 2011 at 1.87. At its low during the 2008-09 financial crisis, the real reached a 2.51 closing level on December
8, 2008. Its strongest point during the last years was 1.54, on July 26, 2011.
2 The August 10-16, 2013 edition ofThe Economist provides commentary on this factor, in an article titled “Carry on trading,” suggesting that high yields have been a prime determinant of currency returns.
Currency has been
an important
component of
overall returns for
the dollar-based
Latin America real
estate investor.

2. Diversification benefits at play, with less volatility than might be expected
THE IMPORTANCE OF CURRENCY TO LATIN AMERICA REAL ESTATE INVESTORS
growth differential against the rest of the world may
shrink. Consequently, while factor #4 from the above
paragraph remains generally intact, points #1-3 have
shown signs of reversal, pressuring Latin American
currencies. Instead of fighting “currency wars” and
the relentless appreciation of their currencies, officials
now face weakening currencies, and in some cases
have carried out interventions in the market to prevent
further weakness.3
How should a real estate investor in the region deal
with currency risk in this changing climate? With the
macro outlook shifting globally, the types of returns
that currency exposure generated over the last half
decade are unlikely to be repeated. However, the moves
in the Brazilian real (12% weaker year to date through
August), the Peruvian sol (-10%), the Colombian peso
(-7%), and the Chilean peso (-6%) also imply that
currencies are closer to fairly valued than 9-12 months
ago. While judging fair value of a currency is an
inexact science, one of the most popular measures –
The Economist magazine’s comparison of the prices of
McDonald’s Big Macs across the globe – provides clues
of overvaluation. Another quantitative way to judge
overvaluation is via trends in the current account deficit.
In the aforementioned four countries, current account
deficits have widened, as strong domestic demand,
aided by appreciating currencies, has raised import
bills. For example, even with somewhat favorable
terms of trade, Peru’s current account deficit ended
2012 at -3.5% of GDP; in 2005-07 it ran surpluses. Chile’s
current account deficit was also -3.5% of GDP last year,
its highest since 1998. Potentially these large current
account deficits were signs of overvaluations of these
countries’ currencies.
A more qualitative way to judge currency valuation is
the “smell test.” Brazilians flocking to the 5th Avenue
shopping district in New York and lugging massive
boxes to JFK Airport on their way home seems like a
sign of overvaluation. Indeed a growing line item in
Brazil’s current account deficit has been the one for
foreign travel. This has repeatedly hit record levels, i.e.,
Brazilians spending
much more abroad
than foreigners do
within Brazil, with
this deficit exceeding
US$1 billion per
month. Conversely,
American travelers to
Brazil have complained for several years about the high
costs of cities such as Sao Paulo and Rio de Janeiro,
where quality hotels and restaurants cost more (until
the recent depreciation of the real) than in almost any
major American city.
Assuming that Latin America’s currencies are currently
more aligned with fair value, real estate investors in
the region may actually benefit. Better to enter Brazil
with the real at 2.30 than at 1.60, as each dollar buys
proportionately more assets, while the risk of a mega-
depreciation has likely fallen if overvaluation is less of
a concern. But, beyond this, we wanted to look at other
considerations for real estate investors in the region. We
examined daily data, from the first day of 2008 through
mid-August 2013, to try to assess any particular trends
in currencies that might have implications for someone
investing in hard assets in the region in 2013. By sifting
through calculations of correlations and volatilities, we
draw the following conclusions:
• The five major currencies in the region all have
positive correlations with each other, over the time
period examined. For example, the correlation of daily
returns between the Brazilian real and the Mexican
PAGE 2
Signs of
overvaluation
of certain Latin
American currencies
are disappearing.
3 The term “currency wars” was coined by Brazil Finance Minister Guido Mantega, where he blamed the developed world’s lax monetary policies for the relentless appreciation that the real experienced in
2009-11.

3. Diversification benefits at play, with less volatility than might be expected
THE IMPORTANCE OF CURRENCY TO LATIN AMERICA REAL ESTATE INVESTORS
peso is 62% (see the below table). However, while
the correlations of returns are always positive, they
also vary. For example, the correlation of the Peruvian
sol with the Brazilian real is just 27%, implying
that there is some
diversification benefit
to holding soles in
a portfolio of real-
denominated assets.4
This is not surprising
given the mechanisms
the Peruvian central
bank uses to take an
active role in managing the volatility of its currency.
Real estate investors in the region should note that
diversification benefits can be earned by holding a
basket of Latin American currencies, that holding
assets in Peru, Chile, Colombia, etc., can help offset
Brazilian real risk for example.
• The U.S. stock market has a high correlation with
currency returns in the region. Over the time period
examined, the SP 500 index, one of the best
proxies for the U.S. equities market, displayed a 56%
correlation with the real and a 66% correlation with
the Mexican peso. Hence, on a day-to-day basis Latin
American currencies historically followed the SP, but
this relationship has shifted in recent months.Year to
date the correlation between the real and U.S. equities
has fallen. But over a longer-term time horizon, the
region’s currencies, considered by the market to be
“risk assets,” are not much of a diversifier against U.S.
stocks, also viewed as risk assets.
• Latin American currencies are often considered
“commodity currencies.” Indeed the correlations here
are positive, as all five currencies display positive
correlations between 26% and 47% against the CRB
Index, a proxy for commodity prices. But interestingly,
Mexico a major oil producer had a 34% correlation
with oil prices, while Chile, a copper giant, saw its
peso only 29% correlated with the daily returns of
that metal. While commodity prices matter, they are
perhaps not as important a determinant of Latin
American currency returns as many might perceive.
• What about China? If one correlates the Shanghai
stock market and Latin American currencies, the
correlations are positive, but low.
• From a portfolio management standpoint, it appears
that Latin American currencies do provide some
diversification against other classes but this benefit
can be limited
depending on the
asset composition
of one’s portfolio.
Currencies in the
region tend to
appreciate, based
on the data, when
commodity prices
rise, U.S. equities rise, U.S bond yields fall, market
volatility (as expressed by the VIX index) is low, and
when Chinese markets are performing well. None
of this should be surprising but what might garner
interest is the degree to which each of these other
assets classes does or does not match currency
returns in the region.
PAGE 3
4 If the correlation between two currencies is 100%, there would be no diversification benefit to holding that second currency.The lower the correlation the better the diversification benefits.
Correlations
between Latin
American currencies
and commodities
prices are lower than
might be expected.
Holding a basket
of Latin American
currencies provides
important
diversification
benefits.

4. Diversification benefits at play, with less volatility than might be expected
THE IMPORTANCE OF CURRENCY TO LATIN AMERICA REAL ESTATE INVESTORS
• We also examined the correlations of the region’s
currencies with other major currencies, dating back
to 2000. We note that the Latin American currencies
tend to have low correlations with the world’s major
currencies such as the yen (negative in fact), the euro,
and the pound. Correlations are higher with other
EM currencies, such as the South African rand and
the Australian dollar. This is to be expected given
that these economies share similar traits with Latin
America, namely a large portion of their exports are
commodities. Correlations with the Chinese yuan are
low, likely reflecting the management of the CNY by
the authorities.
PAGE 4
BRL MXN CLP COP PEN SP UST VIX CRB EUR COPPER OIL SHANGHAI
BRL - 0.62 0.41 0.42 0.27 0.56 -0.27 -0.47 0.47 -0.42 0.26 0.36 0.12
MXN 0.62 - 0.37 0.32 0.23 0.66 -0.33 -0.57 0.41 -0.45 0.25 0.34 0.11
CLP 0.41 0.37 - 0.44 0.28 0.33 -0.17 -0.32 0.43 -0.34 0.29 0.33 0.18
COP 0.42 0.32 0.44 - 0.35 0.27 -0.16 -0.26 0.39 -0.31 0.23 0.32 0.17
PEN 0.27 0.23 0.28 0.35 - 0.18 -0.10 -0.16 0.26 -0.18 0.12 0.20 0.13
SP 0.56 0.66 0.33 0.27 0.18 - -0.47 -0.76 0.44 -0.38 0.26 0.41 0.08
UST -0.27 -0.33 -0.17 -0.16 -0.10 -0.47 - 0.45 -0.31 0.16 -0.20 -0.29 -0.04
VIX -0.47 -0.57 -0.32 -0.26 -0.16 -0.76 0.45 - -0.37 0.34 -0.21 -0.36 -0.08
CRB 0.47 0.41 0.43 0.39 0.26 0.44 -0.31 -0.37 - -0.46 0.43 0.81 0.18
EUR -0.42 -0.45 -0.34 -0.31 -0.18 -0.38 0.16 0.34 -0.46 - -0.22 -0.37 -0.10
COPPER 0.26 0.25 0.29 0.23 0.12 0.26 -0.20 -0.21 0.43 -0.22 - 0.30 0.15
OIL 0.36 0.34 0.33 0.32 0.20 0.41 -0.29 -0.36 0.81 -0.37 0.30 - 0.18
SHANGHAI 0.12 0.11 0.18 0.17 0.13 0.08 -0.04 -0.08 0.18 -0.10 0.15 0.18 -
TABLE 1: CORRELATIONS OF DAILY RETURNS FOR LATIN AMERICAN CURRENCIES VERSUS A OTHER PROMINENT ASSET CLASSES, JANUARY 2008-PRESENT
BRL: Brazilian real; MXN: Mexican peso; CLP: Chilean peso; PEN: Peruvian sol; SP: SP 500; UST: U.S. 10 yearTreasury yield; VIX: VIX Index; CRB: CRB index of
commodities prices; EUR: Euro; Copper: Copper spot price; Oil: WTI spot; Shanghai: Shanghai Stock Exchange Composite Index.
BRL COP MXN CLP PEN
JPY -0.11 -0.08 -0.17 -0.03 -0.04
EUR 0.24 0.19 0.25 0.23 0.09
GBP 0.23 0.17 0.26 0.20 0.07
INR 0.16 0.24 0.18 0.22 0.16
CNY 0.01 0.05 0.02 0.08 0.01
ZAR 0.38 0.26 0.47 0.30 0.14
RUB 0.23 0.27 0.31 0.31 0.16
IDR 0.06 0.13 0.05 0.12 0.07
AUD 0.38 0.29 0.43 0.35 0.17
TABLE 2: CORRELATIONS SINCE JAN 1, 2000
JPY: Japanese yen. EUR: euro. GBP: British pound. INR: Indian rupee. CNY:
Chinese yuan. ZAR: South African rand. RUB: Russian ruble. IDR: Indonesian
rupiah. AUD: Australian dollar.

5. Diversification benefits at play, with less volatility than might be expected
THE IMPORTANCE OF CURRENCY TO LATIN AMERICA REAL ESTATE INVESTORS
• Over the most recent five year period, we note that
the correlations are higher than for the period since
2000:
• We also note that over the last year, the correlations
have fallen somewhat, especially for the BRL versus
the EUR. This is a function of the depreciation that
has occurred in recent months for Latin American
currencies:
• Regarding the volatility of LatinAmerican currencies, it
may be surprising to some observers that the region’s
currencies, in general, exhibit similar volatility to that
shown by the world’s major currencies. The standard
deviation of daily returns of the real since 2000 was
1.05%, highest in our group of five Latin American
currencies. The other countries displayed standard
deviations ranging from 0.27% in the case of Peru to
0.68% for Mexico. Interestingly, the same calculation
for the euro delivers a standard deviation of 0.65%,
implying the euro experiences nearly the same daily
volatility versus the dollar as the Chilean peso (0.63%)
and the Colombian peso (0.65%).
• If we extend the analysis to compare Latin American
currencies to other major currencies in the developed
world and emerging markets, we see the following:
PAGE 5
BRL COP MXN CLP PEN
JPY -0.21 -0.11 -0.24 -0.09 -0.07
EUR 0.42 0.31 0.44 0.34 0.18
GBP 0.39 0.27 0.42 0.28 0.14
INR 0.23 0.29 0.24 0.30 0.19
CNY 0.02 0.07 0.04 0.11 0.01
ZAR 0.60 0.37 0.65 0.39 0.22
RUB 0.34 0.35 0.38 0.40 0.21
IDR 0.10 0.18 0.08 0.19 0.12
AUD 0.60 0.39 0.60 0.46 0.23
TABLE 3: CORRELATIONS SINCE JAN 1, 2008
JPY: Japanese yen. EUR: euro. GBP: British pound. INR: Indian rupee. CNY:
Chinese yuan. ZAR: South African rand. RUB: Russian ruble. IDR: Indonesian
rupiah. AUD: Australian dollar.
BRL COP MXN CLP PEN
JPY -0.18 -0.03 -0.02 0.01 -0.08
EUR 0.20 0.20 0.37 0.20 0.10
GBP 0.12 0.08 0.29 0.19 0.00
INR 0.00 0.26 0.15 0.25 0.22
CNY -0.05 0.03 0.02 0.01 0.06
ZAR 0.40 0.18 0.54 0.31 0.21
RUB 0.23 0.41 0.41 0.47 0.31
IDR 0.09 0.07 0.11 0.11 0.07
AUD 0.36 0.22 0.48 0.37 0.20
TABLE 4: CORRELATIONS LAST 52 WEEKS
JPY: Japanese yen. EUR: euro. GBP: British pound. INR: Indian rupee. CNY:
Chinese yuan. ZAR: South African rand. RUB: Russian ruble. IDR: Indonesian
rupiah. AUD: Australian dollar.
SINCE JAN 2000 LAST FIVEYEARS
Brazilian real 1.05% 1.16%
Mexican peso 0.68% 0.94%
Colombian peso 0.65% 0.78%
Chilean peso 0.63% 0.73%
Peruvian sol 0.27% 0.30%
Euro 0.65% 0.72%
Japanese yen 0.65% 0.74%
British pound 0.58% 0.68%
Indian rupee 0.39% 0.56%
Chinese yuan 0.08% 0.10%
South African rand 1.13% 1.24%
Russian ruble 0.46% 0.70%
Indonesian rupiah 0.70% 0.63%
Australian dollar 0.87% 1.10%
TABLE 5: STANDARD DEVIATION OF DAILY RETURNS FOR MAJOR LATIN
AMERICAN AND WORLD CURRENCIES
Source: Bloomberg and Jamestown Latin America calculations.

6. Diversification benefits at play, with less volatility than might be expected
THE IMPORTANCE OF CURRENCY TO LATIN AMERICA REAL ESTATE INVESTORS
Overall, with the exception of Brazil, Latin American
currencies exhibit volatility that is similar to the euro
and yen. For example since 2000, the Chilean peso,
Colombian peso, and Mexican peso, as can be viewed
above, displayed almost the same daily movements, on
average as the other G-3 currencies.
• The real displays the highest standard deviation of the
major currencies in the region, but is still less volatile
than the South African rand. One should keep in mind
however, that for the most part the real, as well as most
other Latin American currencies, have been freely
floating. In contrast, currencies in countries such as
India and China see greater levels of intervention and
control by the authorities, which reduces their daily
movements.
• It is particularly noteworthy that the Australian dollar
exhibits very similar volatility to the real over the last
five years.
• Volatilities over the last five years are higher than for
the entire period since the start of the century, as the
former period is more impacted by the volatility that
followed the Lehman bankruptcy in 2008.
• We believe that volatility of Latin America currencies
compares favorably with the rest of the world because
economic fundamentals in the region have improved,
markets have become more liquid, and central banks
hold arsenals of reserves to offset major currency
moves. As a result, the region’s exchange rates have
been less susceptible to wild swings over short time
horizons.
In a future piece we will examine how real estate
can serve as a hedge against inflation and currency
movements. During times of depreciation, for example
we can expect that
certain owners of
office space can
adjust their rents
in real terms, thus
maintaining the
dollar-adjusted value
of the property.
In conclusion, currency performance can be a prime
determinant of returns for the real estate investor in
Latin America. The steadfast appreciations of the past
years are unlikely, in our view, to be repeated. But,
by holding assets in a group of countries within the
region, some diversification benefits can be achieved.
Volatilities for Latin American currencies are comparable
to most developed markets currencies, and central
banks are actively involved to prevent major swings
in currencies, which could further the case against
hedging. Purchasing a two-year hedge on the real for
example costs approximately 18% (2.73 for a two year
NDF versus 2.31 for the current spot rate). The investor
relinquishes approximately 9% per annum in return for
currency protection. While we wouldn’t try to predict
where the real will be in 24 months, we do know that
the central bank holds reserves totaling US$375 billion,
which it can use to prevent further weakness.
PAGE 6
Central banks in the
region hold plenty
of firepower to offset
further depreciation
pressures.
JAMESTOWN LATIN AMERICA
Real Estate Private Equity
www.jamestown-latam.com
Contact:
Bret Rosen – Managing Director, Research
+1 212-652-2141
brosen@jamestown-latam.com
Rio de Janeiro • Bogotá • Atlanta • New York