Currency games: to whom and where it was profitable to buy overseas property
Currency fluctuations are affected by various factors: monetary policy, inflation, consumer confidence, GDP dynamics, and the balance of payments. As a rule, along with the growth of the currency, real estate prices simultaneously rise and profitability decreases (and vice versa).
The devaluation of the national currency means interesting opportunities for foreign property buyers. In markets with a significant share of foreign investors, such conditions can cause a surge in demand and even change the phase of the cycle. At the same time, a weak currency in the country where the facility is located presents risks for foreign lessors, since in this case rental income is reduced. So, according to the Financial Times, when in June 2016 the results of the referendum on the UK leaving the EU were announced, the pound sterling dropped to a 31-year low against the dollar – only because of this, the purchasing power of those who received income in US currency increased by eleven %.
When a currency becomes more expensive, it is more profitable for foreign investors not to buy, but to sell real estate, extracting increased profits from the sale. The maintenance of real estate in this case may become too expensive. For example, in 2014–2015, the ruble devalued: the euro went up by 60%, the dollar doubled. If before the devaluation the Russians could buy property in the United States worth $ 500,000 for 17.5 million rubles, after that – for 35 million rubles. The fall of the ruble had a negative impact on the behavior of investors from Russia: according to the Central Bank of the Russian Federation, in 2015, the volume of remittances from Russians for the purpose of acquiring real estate abroad was almost halved compared to 2014.
2017: the rise of the euro and the fall in prices in London
International real estate broker Tranio reviewed the conditions for the acquisition of real estate in Athens, Barcelona, Berlin, London and New York in 2017 for buyers receiving income in 12 currencies. Taking into account fluctuations in rates and the dynamics of prices for houses and apartments, the most favorable conditions for entering the market were for residents of the eurozone in London and New York and for Malaysians in London: for them real estate fell by 1–4%.
* Excluding exchange rate fluctuations
At the same time, for all categories of buyers objects in Barcelona and Berlin have significantly risen in price: in addition to the fact that the euro has strengthened against most currencies, real estate prices in these cities rose by about 10%. The cost per square meter in New York has increased just as much, but a weakened dollar has depreciated price increases for most foreign investors.
Among the currencies examined in 2017, the riyal and the lira fell the most. Accordingly, it became less profitable for the citizens of Iran and Turkey to acquire real estate abroad – for them it increased in value by 20–30%.
What to expect in 2018?
According to forecasts, many trends of 2017 will continue in 2018. In particular, it will still be beneficial for residents of the eurozone to acquire real estate in the UK and the USA. Analysts at many financial companies, including Crédit Agricole and Deutsche Bank, predict that the euro will continue to strengthen against the pound sterling and the dollar due to the improved economic situation in the eurozone as a whole.
Similarly, a strong yuan will contribute to the growth of purchasing power of Chinese buyers. Central banks in different countries increasingly include Chinese currency in their portfolios, and high demand for the yuan can stimulate its growth.
As for British buyers, a survey conducted by Reuters news agency in early 2018 showed that most analysts believe that the pound sterling against the euro and the dollar in 2018 will be stable, although much will depend on the progress of Brexit. The dollar, in their opinion, will continue to decline against the euro and other major currencies.
For overseas buyers, currency fluctuations are just as important a factor in the profitability of an investment as profitability, price movement, and taxation. Changes in exchange rate are always additional risks.
Those who are engaged in a simple rental business abroad and are focused on investing for 10–20 years are not at great risk. The adjustment of exchange rates is critical for those implementing value added projects. Hypothetical situation: an American investor invested money in a redevelopment project in London; for one and a half years, while the project lasted, the pound fell against the dollar by 20% and “ate” all the profitability.
Also, increased risks arise from those who take a mortgage to buy real estate is not in the currency of the country in which it receives income. You should strive to ensure that the cost of credit and income were denominated in the same currency.
Currency rates are impossible to guess, so we recommend diversifying your investments to protect them from currency risks. For those who cannot invest in real estate in parallel in several countries, we recommend investing in the country in which the investor’s currency will have expenses in the medium and long term.