Overseas Property

Whether as a holiday home or as an investment, purchasing property abroad means you will be exchanging your cash for a foreign currency. By definition, this means purchasers are opening themselves up to the movements of the foreign currency markets (i.e. foreign currency risk). Since no one can predict future exchange rates, it could be that potential purchasers end up paying significantly higher amounts than anticipated when having to make the agreed payment or payments.

Let us analyse an example of how a purchase can end up costing much more than anticipated.

In March 2004 Mr Taylor had found a beautiful off plan apartment in a lovely Swiss ski resort for 700,000 Swiss Francs. At that time, the GBP/CHF was trading at roughly 2.3570, which would have meant a total cost of 296,988 GBP. This was just within the 300,000 GBP budget available to family Taylor. The payment method would be an immediate 10% down-payment with the final balance being made at the scheduled date of completion, November 2004.

Of course, one minor detail overlooked by Family Taylor was the fact that exchange rates are certainly not stable over time, but move depending on many variables including, among others, macro-economic data and more significantly, changes in supply and demand.

Mr. Taylor and his family were looking forward to a wonderful Christmas. When the time came to pay for the final amount, instead of the anticipated 630,000 CHF being paid for by 267,289 GBP, they instead had to pay 292,343 GBP, a staggering increase of 25,054 GBP. This is because the exchange rate had moved (in only roughly 8 months) from GBP/CHF 2.3570 to GBP/CHF 2.1550. This equates to a total increase of over 8% and meant that the family Taylor were around 22,000 GBP over budget. The details are illustrated in the table below.

Spot Market	Amount CHF	Rate GBP/CHF	Amount GBP
Mar 04 Total Amount 10% deposit Balance due Nov 04	700,000	2.3570	296,988
	70,000	2.3570	29,699
	630,000	2.3570	267,289
Nov 04 Balance Due	630,000	2.1550	292,343
	Difference (absolute)		+25,054
	Difference (relative)		8.44%

How can this kind of situation be avoided?

If we define risk as the uncertainty of an outcome, then we can reduce this risk or uncertainty by using a Forward Contract or a series of Forward Contracts. For example, Mr. Taylor could have easily fixed a price close to the favourable January level of GBP/CHF 2.3550. This would be done by taking out a Forward Contract thus locking into a price that satisfies his budget and reducing his foreign exchange risk.

Indeed, in some off plan property cases, a series of payments are necessary. In these cases we simply make a series of Forward Contracts or a Forward Time Option Contract in order to guarantee exchange rates at the various payment stages until completion.

To summarise, your dedicated foreign exchange consultant is ready to assist you in your role as a potential overseas property purchaser, in avoiding very expensive, yet common errors.