By Ashley Osborne | Head of UK Residential & Managing Director – International Properties
The difference between you profiting or losing tens of thousands of dollars on your next property can be as little as 1% fluctuation in exchange rate of your dollar versus the currency of the country you are investing in. Having a strong currency means a property that looked sub-par in terms of its return on investment, suddenly becoming valuable.
Therefore, keeping an eye out for currency exchange rate should be a part of your overseas property investment strategy. Despite being difficult to determine, currency fluctuation is still trackable and can be estimated for in the short-run (Global Live Exchange Rate).
How to Manage Foreign Exchange Rate Risks
Ensure you are familiar with the exchange rate market and are tracking its fluctuations as even a slight change could mean you pay far more than what you estimated for. To avoid unexpected fluctuation, investors often use “hedging” tools such as currency future, forwards, and options. Note, these can get complicated; therefore, I recommend you read through them in detail as they might not always be applicable to your case.
An important point to keep in mind when “hedging” is that by removing the risk of loss due to exchange rate fluctuation, you are also forgiving the possible profit you would have reaped should the future fluctuation be in your favour.
How to benefit from Foreign Exchange Rate
If you are a risk taker, then there are ways to minimize your losses without hedging.
- A visit to foreign exchange rate forecast site will be your ultimate ally as it will keep you atop of any currency fluctuations ahead of time.
You can even use this to plan your next huge chunk of cash payment or determine the right time to take a mortgage from an international bank for . Whichever the case, the goal is to take advantage of the currency fluctuation immediately. It is a short run benefit as in the long run, currency always smoothen out to its equilibrium.
- Keep a lookout on major economic changes that will affect a country’s currency in near future.
An example is the recent Brexit vote that has led to the downfall of British pound sterling to an all time low since 2006 (see graph below). Although this has made investing out of UK costly, for overseas investors, this is a major buying opportunity. A house that would have cost you $1 million (in your dollars) a few months ago will cost you a lot less now due to the currency exchange rate.
Whether you apply hedging to avoid risks or stay ahead of the curve to take advantage of the currency fluctuation, exchange rates will play a major role in your overseas property investment strategy. Despite the topic of tracking foreign exchange rate sounding like a matter of professional traders, anyone with foreign investment should appreciate the risks and opportunities involved in currency fluctuations.
Because not all properties are determined by their location, price, and features, sometimes backing the winning currency could be the leading determinant of where you buy your next overseas property investment.