Since 2008 when the worldwide economy crashed there have been numerous opportunities to trade real estate markets around the world. While many of these situations have been “short-term opportunities” there has been the potential to make significant returns from market anomalies. This is the kind of situation which attracts the interest of both inexperienced and professional real estate investors but there are unique factors to take into consideration.
When you are trading in your local real estate market there is no need to consider currency movements because you are buying, selling and receiving income in the same currency. The situation is a little different when you are looking to trade in overseas markets which may operate under different currencies than your local market. This is something which is often dismissed by inexperienced real estate investors but it is a subject which needs to be covered and researched in detail.
Currency markets offer the flipsides of a coin, fluctuations can make you money or they can lose you money. So what can you do to protect yourself from currency movements and how should you factor them into your investment decisions?
Hedging your currency exposure
If you have a significant investment in an overseas development there are ways and means of hedging your currency exposure very similar to an insurance policy. These tools will effectively provide you with a maintained currency exchange rate, at a cost, so that you can calculate your figures going forward with some degree of certainty. While the vast majority of individual real estate investors will likely discount any form of hedging you do need to be aware of ongoing currency fluctuations.
The type and breath the fluctuations we have seen since 2008 have been absolutely enormous and to be honest out of sync with history. However, that’s not to say they will not happen again and you should be aware of potential issues going forward.
Very often when acquiring a property you will be asked to put down a deposit with further stage payments in due course. If you maintain your funds in your local currency, as opposed to the currency in which you are buying the property, there is the potential for fluctuations which can work for and against you. In truth any investment decision should be as cast-iron as possible with limited fluctuations. Therefore you may need to decide whether to use currency options or indeed possibly exchange the full amount into the local buying currency and drip feed the stage payments.
Income and outgoings
If you have a property overseas and you are funding this from your base savings there could be different currencies at play. Depending upon the relevant exchange rate your income/outgoings may fluctuate and this is something you need to be aware of and something you need to monitor. There may be little you can do in reality but to be forewarned is to be forearmed in the world of investment.
Currency exchange rates can work for and against you when dealing in overseas markets where there is a different currency to your local currency. There is the potential for significant movement in exchange rates in the longer term, as all real estate investments should be viewed, although over the last few years we have seen significant short-term fluctuations. Relatively small investors may find it difficult to hedge or insure against currency movements going forward, because of the cost compared to their investment, but those with larger ongoing developments would be advised to take advice on this particular issue.