Today’s “Ask the Expert” column features Andrew Woolley, Executive Director of International Payments with Moneycorp.
Q: What are some of the different currency risks investors may face when purchasing property overseas? And what can be done to combat them?
A: When investing in overseas property, before you begin, you should be clear of the charges and currency risks you might face.
When dealing with large sums of money—such as property prices—factors such as fluctuating exchange rates can strongly affect your exchanged amount. Therefore, when purchasing and managing your property, we would suggest speaking to a currency specialist in order to limit your currency risk and streamline the process.
One of the main things to be aware of is the risk of currency volatility and the affect this can have on the return on your investment. If the currency in the country where your investment property is located depreciates significantly over a five-year period, you could find there is a significant reduction in the return on your investment. A foreign exchange specialist can provide guidance on the currency market you are entering.
You must also bear in mind where the investment income from your property will be paid to, as you could be impacted by charges. If you open an overseas bank account, there can be costs attached, and while it varies from country to country, you could end up paying non-residency fees, for example. Alternatively, if you are transferring your money back to your UK bank account, you may find that they will charge you around 3 – 4 percent of the transaction value. This could have a serious knock-on effect to your investment return.
Be sure to seek sound financial advice before investing. Keep in mind that some foreign exchange specialists work with a number of local financial advisors who can make sure clients know the country’s taxes and charges involved when buying property. The taxation systems can be complex and investors need to be aware in order to avoid being double taxed.
In addition, be aware of the currencies that have historically been more volatile and, therefore, pose greater risk to investors, such as emerging market currencies. If you are thinking of investing in wine in Argentina or Chile, for example, this is a crucial consideration.
Other currencies that investors should perhaps be cautious of, due to a more volatile exchange rate, are currencies with a value correlated to commodity prices. The value of currencies such as the Australian dollar and the South African Rand move with the value of commodities such as oil. Currencies such as these tend to be correlated to commodity prices due to their domestic industries.
There are also a number of currencies that pose less risk to investors. Investments priced in dollars are a more reliable choice for an investor. For example, gold is always priced in U.S. dollars, as are soft commodities such as wheat and grain.
For more information, visit www.moneycorp.com/usa.
