Currency Risk – Should Property Investors Worry?

Back in 2006 when it was fashionable to invest in East European property some investors I know, who were investing in property at the time, would bet on those countries that were about to join the Euro.

Where was the risk they thought in investing in those countries that had no choice but to peg their currency to the Euro? Those countries would after all be joining it one or two years later in any case.

Six years later, a lot has changed, those same investors have grown older, wiser and a lot more cautious about Europe than they were back in their youthful pioneering days and understandably so.

Take for example the value of Sterling against the Euro, the value of these currencies was virtually the same for a brief spell in 2009. I certainly felt poorer on a shopping trip with my good wife in a country that had recently joined the single currency.

Yet the value of the Euro has dropped by 25% against Sterling since then, which is why investing in European property in Spain and perhaps even Portugal now seems like a good idea to some investors – particularly with property values at rock bottom.

It may on the other hand not be so good for those who invested in those East European countries only to find that property prices have fallen and so has the value of their investment.

However everything seems like a good idea at the time and buying property abroad can throw up some unexpected problems if there is no long term strategy to ride out any short term corrections. What happens for example if your finance to invest in that property is in Euros?

The chances are you may end up paying more interest, which may not be much of an issue after the savings you make on your currency being stronger than the Euro.

On the other hand if Greece sorts itself out, then we may see the Euro rise against other currencies making those mortgage payments higher if they are converted from a weaker currency.

This is something to consider before borrowing to invest and taking a short term view.

Now for Mr Cash Investor there should few problems, the Euro is unlikely to sink too much lower which means the value of his investment may actually increase in his home currency in the medium term.

So when it comes to exit time, he will at least have this to fall back on if, for some reason, rental yields don’t live up to expectations on that Spanish holiday property.

We all know that the Euro despite recent problems is about as stable as Sterling or the US Dollar, so what happens if we are considering investing in property outside the Eurozone?

Turkey property is looking attractive at the moment as is property in Brazil. These two countries have seen the value of their currencies fall dramatically in recent years.

The Brazilian Real has fallen by nearly 20% against Sterling in the past two years while the Turkish Lira has fallen by nearly 30% against Sterling since 2008.

This is one of the reasons why investors are rushing in to buy property in Brazil and Turkey – however raising finance in Turkey might cost more with the interest rate currently at 5.75% as opposed to 0.5% in the UK and 1% in Europe.

In the case of Brazil, investors still need to raise finance in their home country which is probably a good thing anyway with interest rates above 9%.

On this evidence it may not be worth keeping yourself awake at night as long as you focus only on the interest rate you are paying and the strength of the currency you are using to finance the investment.

The best opportunities right now are in markets where you can raise the cash to invest in your home country and invest in property that pays for itself in countries that have strong, stable economies.

That way even if there is a major shock and the currency is devalued, you can bet that it will bounce back as the economy becomes more competitive as exports become cheaper and we see the value of the currency rise once again.

So by taking the long term view in countries like Turkey, Brazil and the United States, currencies going and up and down will have very little impact on your return on investment.

Are you worried about currency ups and downs? Please leave your comments below:

Kind Regards

Brett Tudor
Property Expert