Exchange rate movements can substantially affect the bottom line of any property investment made in a currency other than that of your home country. Accordingly, if you plan on investing in foreign real estate, managing your foreign exchange risk properly makes sound business sense.
Of course, you will want to get the best deal on the larger currency transfers required for the property purchase and sale transactions, since those will be your primary foreign currency exposures.
Nevertheless, you might also want to hedge your currency risk over your anticipated investment time horizon, or you might need to make regular foreign currency payments to service a mortgage.
Ideally, such forex transactions should be made at the most competitive rates possible so that you can maximise your returns and minimise your exchange rate risks.
The rest of this article will describe some ways that you can manage the currency risk arising from your foreign property investment appropriately.
Shop for the Best Forex Rates
Since you do not have to use your local bank to make forex transactions or to hedge currency risks using forward contracts, you can inquire with other foreign exchange providers about the exchange rates they offer.
Shopping around like this can improve your exchange rate by 1 to 2 percent when making currency transfers. Reputable foreign exchange providers like OzForex work hard to ensure that your foreign exchange transactions are easy and efficient to execute.
Naturally, your top priority will be to shop for the most attractive forex rate on your initial foreign real estate deposit or when you are repatriating funds after a property sale. Nevertheless, you can also save substantially by getting better forex rates on periodic currency transfers that you might require in order to service a foreign currency mortgage.
Use Limit Orders
Limit orders placed with a reputable forex provider can assist you in obtaining an exchange rate that is better than what you might have received if you had just executed your currency transfer at the initial market rate.
Entering a limit order involves setting a target exchange rate for a particular currency pair and amount of currency that is better than the prevailing market rate. You will also need to specify whether you want to buy or sell that currency amount if the market reaches your target rate.
Should the exchange rate move to the more favourable target level of your limit order, your forex provider will then automatically transact the currency amount you specified in your order.
Since most real estate investors prefer not to watch the forex market constantly, they can let their forex providers monitor the market for them by placing limit orders at strategic exchange rates in order to benefit from a temporary improvement in the relevant forex rate.
While most stock brokers will work limit orders for their clients, this useful ability is less commonly offered by forex providers. If you think placing limit orders might make sense for you, make sure to ask any prospective forex provider if they offer them.
Using Forex Forward Contracts to Manage Real Estate Currency Risk
Foreign property investments are typically done over a relatively extended time period of months or years. This makes forex forward contracts useful to real estate investors who wish to hedge the currency risk associated with buying foreign properties against longer term adverse forex rate shifts.
Foreign property investors can also use a series of smaller forward hedges when they need to make periodic foreign currency payments in order to service a mortgage.
Using forward contracts to manage property related forex risks permits you to set a market forex rate in a given currency amount for delivery on a specific future date. The forward rate is related to the spot rate by a mathematical formula that depends on the prevailing deposit rate differential between the two currencies involved for the chosen time period.
You can execute a forex forward hedge as early as two years before you will actually need to make a foreign exchange transaction related to your property investment abroad. Such a hedge can also typically be extended forward in time as its delivery date approaches should you wish to hold the property investment for a longer time period than originally anticipated.
If forex forward contracts might suit your foreign property investment hedging needs, then be sure to ask a prospective forex provider whether they can offer this product to you.
To learn more about your foreign exchange requirements, speak to OzForex. You can contact them via Property Women’s Property Professional Network