Globalization offers international investors the opportunity to build wealth and own property anywhere on the globe. Real estate continues to be one of the attractive sectors for investors. When investing in real estate abroad, investors pay keen attention to a number of factors including:
- trends in the demand and supply of residential and commercial property in the target market
- interest rates (if there is intention to borrow in the foreign currency)
- taxes (for rentals)
- exchange rates
Exchange rates are of specific interest in this article. Movements in foreign exchange rates are caused by economic factors such as inflation, monetary policy, consumer confidence, balance of payments, and GDP dynamics. International investors need to follow exchange rate fluctuations closely because they have significant influence over the real estate market. Below, we explore ways in which Forex rates affect this market.
When a currency becomes stronger, property prices increase
If a foreign currency strengthens against the dollar, for instance, you would have to use more dollars to purchase property in the foreign country. This implies that the property’s price increases and yields fall. The best time to buy property in another country, therefore, is when your home currency strengthens against the foreign country’s currency.
Currency devaluation: Good or bad for investors?
Currency devaluation may mean different things to different types of foreign property investors. If you are a foreign property buyer, currency devaluation in a country that has strong foreign investor presence may prompt extraordinary demand for property.
A weakening currency poses risks to international landlords because it reduces their income when it is converted into the stronger currency. For example, if an US investor has commercial property in China and the USD/CNY changes from 6.71CNY/USD to 7CNY/USD, rental income of CNY 1,000,000 reduces from USD 149,031 to USD 142,857.
A growing currency: better to sell rather than buy foreign property
When a foreign currency grows, as evidenced by falling exchange rates against the international investor’s home currency, property maintenance becomes more expensive and this reduces property yields. During such times, it is more profitable to sell than to buy property.
Exchange rates affect the cost of living
If you plan to buy property in a foreign country and spend a significant amount of time in that country as well, the exchange rate will impact your cost of living. A weak home currency will increase your cost of living because it purchases less of the foreign currency you are using. On the other hand, a stronger home currency lowers your living costs.
Factoring in exchange rates when making foreign property investments can make the math sophisticated for many investors. Here are a few jargon-free basic considerations to make when buying property overseas:
Currency to be used in the property buying transaction: Property can be traded either in the home or foreign currency. You should be concerned about transaction risk if the transaction will be carried out in the foreign currency. The strength of your home currency will determine the value of the property. If a choice is given to use either currency, it is better to buy foreign property using foreign currency if your home currency is strong.
Avoid currency risk by living in the property you bought in a home currency based market. You will not need to convert any currencies and this means currency risk is completely avoided.
In case of foreign rental property, a strengthening foreign currency reduces the rental income when it is converted into your home currency.
Exchange rates affect property management costs. Consider an investor whose home currency is the dollar. In periods when the dollar is strengthening, for instance, operating expenses such as utilities, homeowner association fees, and taxes reduce in dollar terms. When the dollar weakens, property management costs increase dollar terms.
Forex affiliates, trader and brokers make up a significant part of international property buyers. They have a considerable advantage over other types of overseas property investors since they can closely follow fluctuations in exchange rates in order to reduce foreign exchange risks and maximize profits when trading property.
All Investors need to take exchange rate fluctuations as an equally important factor of consideration when planning to invest in foreign property. Exchange rate adjustments are specifically crucial for buyers engaged in long-term real estate projects abroad. It’s clear that exchange rates affect not only property prices but also property management costs, the owner’s living costs and ultimately the property’s yields.
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