Overseas property investments – how FX fees are taking a chunk of your investment

Real estate has always been seen as solid, go-to investment where we can determine our own risk, leverage and returns. Despite retail investors saturating some domestic markets, it’s becoming easier to find opportunities and administer buying a house abroad. This is in part down to an increasingly globalised economy, particularly with common markets like the E.U.

The cost of property in countries that receive a lot of foreign investment is extremely expensive – and rising. Some popular countries and cities for investment include Hong Kong, Spain, New York City and Australia. The average house price in Hong Kong is now an eye-watering HK$5.4 million, whilst central Europe’s property market is also fast growing. It has become such a vibrant investment that there are many property investments that are tailor-made and promoted to foreign investors overseas for very high prices.

Central and South America currently is perhaps the latest hotspot for overseas investment. Brazil, Panama, Dominican Republic, Mexico and Belize are all growing in tourism and infrastructure. Flights to those places are becoming more affordable, the local macro-economies are doing well, and there are a surprisingly wide range of property markets.

In order to make these property investments abroad, you of course usually have to exchange currency – and although it is fairly obvious, each of the previously mentioned destinations have their own currency. This is an often overlooked yet crucial part of the international property investment. It is often you hear banks across the world claim that they have a 0% commission policy. This is not true. They take markups – and they take them somewhat covertly. They integrate these markups (the difference between the exchange you get, and the actual market rate) into the “exchange rate” they offer you.

In the UK, Australia and the E.U., these markups average between 1.5% and 3%. It is a little more in North America, where you can expect to find markups of between 2% and 5%.

Given banks’ attempts to keep their markups relatively quiet, and often pseudo 0% commission branding, investors can lose out on a lot of money without even realising it. Not only is it the bank’s fault though, but the process of investing in a property, let alone abroad, can become overwhelming and exchange rates can surprisingly often be overlooked.

An example of how much currency exchange can cost you

When it comes to property, investment capital is always going to be large, and often in one go. Investing a lump sum of over $100,000 is on the lower end, with investments often averaging much more. Australian bank Westpac for example often advertised as having no/few fees, but their exchange rate markups can be over 5%. A modest $100,000 investment of a property in Europe could then cost you over $5,000 in fees. This directly impacts your return on investment and eats into your investment.

Not only is the exchange rate markups an issue, though. There are fixed fees for International Money Transfers (IMTs) with most banks. This is on top of, and seperate from, the exchange rate markup. If we take a CommBank in Australia as an example, their fees look like this.

These fees will add to the bill of wasted money, and eat away at your investment potential. You are looking at several thousands in wasted money when transferring money abroad in a bank for a significant investment.

What’s the solution?

Money transfer companies are perhaps the closest thing to a perfect solution for people who send money abroad. They are even more crucial for expats and the majority of foreign investors in property.

Money transfer companies are essentially companies designed solely to fulfill the necessity of currency transfer. They are often digitally focused, making them extremely accessible via mobile apps, as opposed to the time-consuming queues of visiting a local branch like with banks.

It is their focus on one service and their digital-centrism which makes them so efficient. Almost all of them will not induce fixed fees for administering an international transfer. Instead, they make their profits on having a (small) exchange rate margin of usually less than 1%.

Having a small markup works for them because they often require a significant transfer of around £100, or sometimes £1,000. This is great though, as this use of scaling benefits the client with a low margin rate.

There are many transfer companies, thankfully, making it healthy competition. Finding the best company can actually be a pleasurable experience when you’re accustomed to being ripped off by traditional banks – like picking the best from a good bunch. The vast selection of companies all offer different benefits. For example, some will offer an extremely fast sign up process, but requires relatively high minimum transfer, whilst another may offer corporate FX expertise, but may only have 40 currencies instead of 120.

Additionally, online reviews of the specific services the companies provide are plentify, where you can easily see customer satisfaction ratings. This is difficult to come by for traditional banks, as they have so many different departments, staff and services.

Online payment service PayPal had such huge amounts of success with a massive market cap, but it falls short with money transfers with fees often totalling over 5% or 6%. The digitalisation of payments was a modern solution for our interconnected world. But now we have a decentralisation effect of smaller companies specialising in their niches, like international transfers, and offering extremely healthy competition for investors.

These companies may be smaller than PayPal or traditional banks like Swedbank, but they are growing into significant powerhouses themselves. Alipay for example was bought by WorldFirst, and Transferwise is considered Europe’s most valuable startup. Transferwise is even expected to go public once it hits $10bn.

The popularity of fintech startups almost always come at the cost of traditional financial intermediaries. Yet it is to the absolute benefit of the customer, and particularly in the case of currency transfers, retail investors. Shopping around for new digital companies to handle large amounts of your money for a service would have been seen as risky, or unheard of, a decade ago. Now, with the transparency and the plethora of online reviews, it has become an absolute necessity.

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