Property investors ride the currency carousel

Real estate winners and losers in bull and bear markets

Staff Report
00:00 July 26, 2017
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Cross-border buyers will spot opportunities when currencies are cheap and overseas real estate looks better than their home markets. This can add a dynamic, often countercyclical, to local housing markets with a high proportion of overseas buyers.

Bear markets caused by an economic downturn often coincide with a weak currency. Here, foreign currency buyers can be the first to reinvigorate a market where they see sound long-term demand fundamentals. Those looking for capital growth may be further encouraged by a currency play if the value of the currency in which their new asset is denominated is likely to rise against their home currency.

The downside to this strategy occurs for buyers seeking regular income from the investment in their home currency. Low exchange rates may make a property look like a bargain at point of purchase, but falling foreign exchange rates will impoverish any rental income. Overseas buyers will often seek higher yields than domestic buyers at this stage of the cycle. A degree of domestic capital value correction is therefore often needed before overseas income investors are encouraged into early bear markets.

“There are a few exceptions to the rule — the UAE is one of those as it faces two headwinds simultaneously,” says David Godchaux, CEO of Core Savills. “First of all, our local market has been relatively bearish from 2014 to 2016, followed by a relatively strong currency due to the UAE dirham being pegged to the US dollar. These two negative effects are untypically combined at the same time. Any economy that is pegged to another makes a rare exception in a bear market.”

In bull markets, where both capital growth and a strengthening currency have been experienced, overseas owners may be inclined to sell and take the real estate and exchange-rate profits. This can add liquidity into local markets, which, at this stage, risk becoming sluggish and expensive as properties acquire a rarity value in low-turnover but high-demand markets. Without willing sellers, markets risk becoming bubbles during this phase so overseas owners can act as a welcome lubricant in an otherwise sticky situation.

In the same bull markets, overseas owners investing for income rather than capital growth might be inclined to delay profit-taking to enjoy a currency-enhanced income. They risk missing a selling opportunity if the market and/or the local currency then goes down. Consequently, income investors from overseas may be more likely to take a long-term view, investing over more than one property cycle. The most sophisticated might use hedging products to reduce their currency risks, but these can be costly and reduce returns significantly.

“In the US, California and Florida are perfect examples of bull markets, where yields have compressed and interest rates are raising, which is where the UAE is progressively moving towards,” explains Godchaux. “On a positive note, investors looking at Dubai are increasingly doing so with the long-term perspective in mind — with a maturing and deeper property market in the backdrop and long-term capital gain expectations.”

Year-on-year, Godchaux notes a contraction in the total number of investors, amplified by a decreasing number of non-regional buyers. “A strong dollar continues to affect the traditional buyer nationalities such as Indians, British and Pakistanis, as their currencies have devalued significantly over the last year,” he says. “Nonetheless, Dubai continues to be the most mature real estate investment destination in the region with a diverse pool of investors from over 136 countries.”