WHAT INTERNATIONAL PROPERTY CONSUMERS NEED TO KNOW
In simple terms, currency risk is the risk that the price of one currency will drop in relation to another. Unfortunately, it is a risk that investors often fail to anticipate when buying international property. Indeed, currency risk can impact all aspects of a cross-border transaction including:
- The price you pay for a foreign property in your home country currency
- Your transaction costs and fees
- The income you generate from foreign property investment
- Payment on loans, costs of maintenance and other operating expenses
- Gain/loss on the sale of the foreign property
On the one hand, currency risk can be a blessing, for example, if your home country currency strengthens in relation to the currency of the foreign country targeted for investment (at least at the purchase stage). It can also be a curse when your home currency weakens in relation to the currency of the target country.
Take for example a purchaser who contracts to purchase a property for 1 million USD with closing set for 90 days. The purchaser resides in France and is holding the purchase monies in Euros. Both currencies are hard currencies and are generally perceived to be stable. Even in this case, a modest 3% drop in the Euro relative to the USD would increase the purchaser’s cost by a corresponding 3%.
Now imagine the same facts except the purchaser resides in Mexico and is holding monies in Mexican Pesos. If the Peso weakens by 10% relative to the USD, the purchase just became 10% more expensive, thereby jeopardizing the transaction.
Some sophisticated investors will sell/buy currency futures as a hedge to mitigate currency risk. For others, the best solution will be to convert funds into the target country’s currency as soon as possible. This may include:
- Transferring the purchase money to the purchaser’s account in the target country (if one exists)
- Transferring the purchase money to an account the purchaser has in his/her home country and in the same denomination as the target country (if possible)
- Wiring monies to an escrow agent, or an attorney or other agent in the target country to hold in their capacity as a fiduciary (if possible)
- Pre-paying purchase price installments on pre-construction property to the foreign developer in extreme cases.
The route a given investor selects will be dictated by the circumstances. That said, if an investor’s goal is to mitigate the risk of currency fluctuations and maintain their relative purchasing power, it pays to act quickly.