Nathan Bray, Business Executive Director at TorFX, discusses how important foreign currency exchange can be when closing a deal with foreign or local investors. He also discusses the various factors that can affect foreign exchange rates and offers some valuable advice for agents with international or local buyers with foreign investment.
Years ago, when I was heading up an FX trading desk at a bank, senior management asked me to drop what I was doing (never a good feeling when the market is busy) and come into a meeting room. Waiting inside were several grim-faced gentlemen who had advised an Australian client on the purchase of a company in the USA.
When they first commenced price negotiations, 1 Australian Dollar bought 75 US cents. Now however, days before settlement, 1 Australian dollar only bought 65 USD cents. With settlement fast approaching, and the client yet to purchase any USD, my advice and help was now being sought. The truth of the matter is that, by this point, there was little I could do to help.
This true story highlights the fact that all too often where international transactions are concerned, little thought or planning is given to exchange rates; currency transfers are often an afterthought, with currency purchased just before it’s needed.
If you’re a real estate agent, and have clients thinking about buying or selling an overseas property, already own one, or are considering an overseas investment, you should be thinking about or advising your client on currency needs well in advance of making a transfer.
The AUD/USD exchange rate has spent 2017 fluctuating between 0.7150 and 0.7917 since January, with sudden shifts in the pairing having a significant impact on currency transfers.
For example, the AUD/USD rate moved from 0.7580 to 0.7325 in just 2 weeks from the end of April to early May this year. Put into context of say a USD 500,000 Bali Villa purchase, that “normal” move translates to a cost increase of AUD 23,000 to Australian purchasers, and that’s in market conditions considered low volatility!
The Australian Dollar recently hit a two-year high against the US Dollar, but a number of factors could see the ‘Aussie’ either build on these gains or reverse them in the months ahead.
The Australian Dollar has shown considerable resilience in recent months, strengthening despite the price of Australia’s key export, iron ore, floundering.
Meanwhile, as the US and much of the rest of the world start looking to tighten monetary policy and raise interest rates, the RBA is staying on the fence with its policy plans. While job growth has beaten expectations in recent months, weak wage growth and low oil prices mean that inflation is below the targeted range. The RBA has started to take a more hawkish tone, but rates are still unlikely to rise for the foreseeable future.
Weak commodity prices and a lack of RBA policy changes could soften the Australian Dollar as 2017 continues, but with the federal government relying on economic and wage growth to return the budget to surplus, a weaker AUD is desired by some.
While valuation models can assign a degree of probability to economic risks, the same cannot be said for the uncertainty of geopolitical risks. USD is weakening against most G10 currencies despite a strengthening domestic economy and rising interest rates. The uncertainty surrounding Trump’s presidency, continual allegations of Russian interference in the election, and impeachment speculation are all weighing on the USD. With geopolitical risks at their highest levels since the cold war, tensions in the Middle East, North Korea, and the South China Sea, the risk of any miscalculation escalating is palpable. Adding to tensions are Trump’s desire to break away from the Paris climate accord, border security, and protectionist rhetoric. Any increase in uncertainty can quickly fuel financial market volatility and how Trump responds to North Korea’s missile tests remains a particular concern.
As illustrated earlier, exchange rates have a material impact on the purchasing costs of foreign properties even in normal market conditions, let alone during periods of extreme volatility.
Depending on your reasons for purchasing a foreign property, exposure to exchange rates does not finish with the purchase.
Consideration needs to be given to whether the purchase is of an existing property or a new build which requires instalment payments as construction milestones are met. This can often mean payments are spread out over one or more years, especially if there are project delays.
Also warranting consideration are questions such as: Will the property be rented out? Are there any ongoing maintenance expenses? How long will the property be held for and is there a time frame in which the property may be sold?
An Australian client of mine, for example, bought a villa in Phuket priced in USD, receives USD in rent, pays staff in Thai Baht, and has a Spanish National property manager who he pays in Euros. The villa title itself is on a 25-year leasehold so at some stage in the future he will wish to sell the villa on. In this example, rental income and ongoing expenses are fairly predictable, but the final sale value of the property is less so and its timing may well be based on how the currency market performs even more so than the relative strength of property prices.
The key to successfully managing foreign currency risks is to first identify where exposures exist and which currencies are involved, and this can be made simpler with the support of a foreign exchange specialist.
Many clients seek advice from currency experts just before they need to make a transfer. While there is nothing wrong with that, the problem in essence is it leaves property purchasers in particular at the mercy of the market, forcing them to pay the prevailing market rates for their currency.
There are many strategies that can be employed such as averaging in, using limit orders, buying currency in advance, using forward contracts, and time options. The key to all the above is planning well in advance so you have more control. Ideally, you should consult a currency specialist and discuss the available transfer options as soon as possible.
While buying a property can be exciting, it is a substantial investment requiring a significant amount of due diligence and the services of specialists such as buyer’s agents, tax advisors, solicitors, and mortgage brokers to reduce the risk.
When considering overseas property investment, foreign exchange movement is another risk factor that needs to be mitigated, and engaging a currency specialist for guidance throughout the whole ownership “lifecycle” should be one of your top priorities.
About the author – With offices all over the world, TorFX are leaders in foreign exchange. TorFX are trusted with over 50,000 private clients and 4,000 corporate clients to provide outstanding exchange rates and expert guidance. Nathan Bray, has years of experience within this field and possess valuable knowledge and experience.
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