Is Real Estate truly the most secure investment?
When the time come to invest most people tend to consider real estate as the most secure long term investment.
This is true for many reasons, one of which being that while companies may go out of business real estate properties will exist forever. In addition, but for period of bump like the current crisis, the average price of properties will appreciate over the long term steadily.
Within reason it is true that real estate is the most secure long term investment. At least it is true when you are purchasing within your own backyard or to the least when you are purchasing a property which is located within a country that is using the same currency than your own.
Foreign currency volatility a factor often overlooked by buyers of Thai real estate
Now buyers that are purchasing real estate in Thailand or other exotics countries are often realizing the dream of a lifetime and are so engrossed in the details such as “where to put the swimming pool” that they will lose perspective and forget the big picture.
As to the investors they will generally be so busy reading the fine prints of the rental guarantee offered to them by the developer or so busy assessing the status of the local real estate market and the potential capital gain they may realize in this “hot market” that they will simply forget to consider another issue closer to home.
The factor that buyers often overlook when buying real estate into foreign countries is the volatility of the foreign exchange market.
I mean what is the point to purchase a property located within a market where properties prices appreciate regularly (for example 5% per year) if the currency of this country is regularly losing value against your own (for example 5% per year).
At the end of the day foreign currency volatility will affect your investment in foreign real estate. The price of your property may have increased within the local market and you may have done a steady capital gain. But your capital gain on the local market may actually be translated into a loss if you factor the fact that the value of the foreign currency in which you have done the purchase has eroded regularly since you made your purchase.
Euro Vs US Dollar / Thai Baht Vs British Pounds
This problem will not occur only when you purchase a property in an exotic country like Thailand. Look for example what would have happened to the investment of a French investor that would have purchased a property into the US in January 2002.
Our first buyer is Albert Dupont, a French citizen who purchased property in the US in January of 2002. The price of Albert Dupont property was USD 1,000,000 or EURO 989,410 at the time of the purchase
Our second buyer is John Smith, a US citizen who purchased property in France in January of 2002. The purchase price of the property was EURO 989,410 or USD 1,000,000 at that time.
For the sake of this discussion, we’ll assume that Albert Dupont and John Smith have purchased properties with equivalent features.
While both John Smith and Albert Dupont paid the same price for their properties in 2002, if you now factor the value variation between the Euro and US dollar over the past seven years, John Smith and Albert Dupont are no longer in the same situation.
Indeed, in January of 2002, one US dollar was worth EURO 0.98941 in January of 2009 one US dollar was only worth EURO 0.7411.
If Albert Dupont were to resell his US property in January of 2009 at the same price that he paid for it in 2002 (i.e. USD 1,000,000 (EURO 989,410)), he would receive only EURO 741,100 at today’s exchange rate. In other words, if he were selling his house at the same price he purchased it in 2002, Albert Dupont would occurred a loss of EURO 248,310 or USD 335,055 less than he paid seven years ago, a loss of 33.5% over a 7 years period.
On the contrary, if John Smith were to resell his French property today at the same price he purchased it i.e. EURO 989,410 (USD 1,000,000 in January of 2002), John Smith would receive USD 1,335,000, a gain of 33.5% in comparison to the original purchase price.
Therefore do not overlook the foreign currency factor when you are purchasing a property into a foreign country because this factor will affect the purchase price and/or the value of your dream property. Of course you may be as lucky as John Smith and ultimately benefit from the foreign currency volatility but experience taught me that “luck” should not been a factor to take into consideration when investing.
This problem exist not only when you purchase a property ready to transfer but also when you purchase off plan.
One of our clients has purchased off plan a condominium in Thailand at a price of 9,000,000 THB.
At the time when the client signed the agreement the British Pounds was 1 GBP = 62 THB. At the time when the developer finally transferred the property to our client the British Pounds was only 1 GBP = 55 THB drastically increasing the purchase price in the buyer currency (from 145,161 GBP to 163,636 GBP).
While the price of sale of the property in the local market is still the same than it was at the time of the purchase our client had to spend 18,000 more pounds to purchase his property than he first anticipated.
This is one of those issues for which I do not have a “ready made” solution to propose you. But even so I still believe it is and issue worth discussing in a post if only to raise awareness of said issue among offshore real estate buyers. I’m indeed a firm believer of forewarning investors of any pitfalls that may affect their investment which is why I started this blog in the first place.
Note: This post is an excerpt of Rene Philippe Dubout first book: “How to Purchase Real Estate Offshore Safely: The Case of Thailand” published in february 2009.
It was also first published as a post by Rene-Philippe Dubout on his former blod www.howtopurchaserealestateoffshore.com. The version posted this day is a modified version.
About the Author:
The author Rene-Philippe DUBOUT is a lawyer since 1990 when he was admitted to Geneva bar (Switzerland). He practiced as a litigator there for 10 years until he moved to Thailand in 1999. In 2002 he founded with a group of Thai lawyers Rene Philippe & Partners Ltd a local law firm that specialized in Cross Borders Investments and Real Estate. He has been lecturing in several Thai Universities and a speaker to numerous conferences and seminars. He is the author of a must read book:”How to Purchase Real Estate Offshore Safely: The Case of Thailand”.
© Copyrights 2009 – Rene Philippe Dubout – This article may be reprinted if information about the author, the websites, and the URLs remain intact.
Originally posted 2009-07-27 05:57:28.