In many overseas property markets, particularly those less mature than those in developed countries and major cities, off-plan properties make up a significant portion of transactions. This is often due to the nature of these markets, where new developments are a primary driver of growth. A prime example is Thailand, where a substantial percentage of property transactions in key resort destinations like Phuket and Koh Samui involve off-plan properties. Exchange rate risk is higher when buying off-plan properties because the extended settlement period allows more time for exchange rate fluctuations, potentially impacting the overall cost of the investment.
Exchange rate risk when buying off-plan property exists when the purchase price is specified in one currency, your funds are kept in another currency, and the balance is settled over an extended period, rather than through a single payment at the time of signing contracts. Currencies continually fluctuate, and, as an investor, the risk is that the currency in which you hold your money weakens in relation to the pricing currency during the period of settlement. Especially in the case where the property for sale is priced in a volatile currency, exchange rate movements can significantly impact the cost of an investment.
A Simplified Example for Buying Property in Thailand
Note: this example is simplified to illustrate the concept. In practice, the balance after the deposit is typically paid in instalments according to a payment schedule tied to construction milestones as the property is built.
Suppose the price of an off-plan villa is 20 million Thai Baht (THB), with a contractual construction period of 12 months. The buyer pays a 10% deposit upon signing the contract, equivalent to 2 million THB. This leaves a balance of 18 million THB to be paid upon completion. The buyer’s funds are held in USD, and the exchange rate at the time of signing the contract is 36 THB/USD.
At this rate, the deposit of 2 million THB is equivalent to $55,556 USD (calculated as 2,000,000 ÷ 36). The remaining balance of 18 million THB is equivalent to $500,000 USD (calculated as 18,000,000 ÷ 36).
Assume the villa is built on time, and after 12 months, the property is ready for handover. However, during this time, the exchange rate has shifted to 32 THB/USD due to fluctuations in the currency market. Now, the effective cost of the remaining balance is calculated as 18,000,000 ÷ 32 = $562,500 USD.
The total cost in USD is now $618,056, reflecting a $62,500 increase in the balance due to exchange rate fluctuations.
Even though the property price remains fixed in THB, the weakening of the buyer’s home currency (USD in this case) against the Thai Baht increases the effective cost. The more the USD depreciates, the more expensive the property becomes in dollar terms.
A More Realistic Example for Buying Property in Thailand
Now let’s modify the above example to make it more realistic. Let’s assume that the balance of 90% (18 million THB) is paid over four equal instalments tied to construction progress as the villa is completed over the course of a year. For the sake of clarity, we assume construction progresses in such a way that each instalment falls due three months apart and that the exchange rate at the time of each instalment is as follows:
• First instalment: 33 THB/USD
• Second instalment: 34 THB/USD
• Third instalment: 36 THB/USD
• Final instalment: 36 THB/USD
Let’s calculate the effective cost in USD for each instalment and the total cost:
1. First instalment:
18,000,000 ÷ 4 = 4,500,000 THB (instalment amount)
Exchange rate: 33 THB/USD
Effective cost: 4,500,000 ÷ 33 = $136,364 USD
2. Second instalment:
4,500,000 ÷ 34 = $132,353 USD
3. Third instalment:
4,500,000 ÷ 36 = $125,000 USD
4. Final instalment:
4,500,000 ÷ 36 = $125,000 USD
Total cost in USD:
$136,364 + $132,353 + $125,000 + $125,000 = $518,717 USD
In this scenario, the effective cost of the villa is $518,717 USD, compared to the initial estimate of $500,000 USD if the exchange rate had remained constant at 36 THB/USD for all payments. The fluctuating exchange rates have added an extra $18,717 USD to the overall cost, showing the impact of exchange rate risk when payments are spread out over time.
This example illustrates the importance of managing exchange rate risk when buying off-plan properties in Thailand. While developers typically quote around one year for a construction period for completing a villa, delays are common. One frequent cause of extended timelines in Thailand is the unpredictable weather and heavy rainfall during the monsoon season. In many cases, villa construction can take significantly longer, often extending by around 50% to a completion period of approximately 18 months.
For condominium projects, the construction period is typically much longer, with most developments requiring at least two to three years to complete. The longer the construction timeframe, the greater the exposure to exchange rate movements and the associated financial risks.
Managing Exchange Rate Risk
One way to completely eliminate the risk of a weakening currency during the construction period is to send all of the remaining funds (after the initial deposit) to Thailand and exchange them into Thai Baht immediately after initial contracts are signed. These funds can then be held in your lawyer’s escrow account until they are required for staged payments to the developer.
While this approach guarantees the total price in your home currency and eliminates exchange rate risk entirely, it places a significant demand on the buyer’s cash flow. One of the key advantages of purchasing off-plan property is the flexibility of spreading payments across the construction period, easing cash flow for the buyer. Sending all funds upfront to a lawyer compromises this benefit, making it less appealing for many buyers.
Another option to manage exchange rate risk is to agree on a fixed exchange rate at the time of contract signing. Under this arrangement, each future instalment is calculated based on the agreed rate, regardless of currency fluctuations. This approach requires both parties—the buyer and the developer—to agree in advance, which may not always be straightforward but could provide peace of mind to the buyer.
Alternatively, the buyer could negotiate with the developer to set the price of the property in their home currency, such as USD. This arrangement transfers the exchange rate risk to the developer, as all future instalments would be calculated in the agreed currency. Developers may or may not agree to such terms, as it adds financial risk on their part. However, if successful, this strategy fully mitigates the buyer’s exchange rate risk.
Managing exchange rate risk ultimately involves weighing the importance of cash flow flexibility against the certainty of locking in the total price in your home currency. Buyers should carefully evaluate the options available and, where necessary, seek professional advice to mitigate the potential financial impact of currency fluctuations.
Currency movements can, of course, work in your favour, reducing the effective cost of your property. However, the key point is having the ability to manage your cash flow and know the total price of the property in advance. Managing exchange rate risk when purchasing off-plan property ensures that unforeseen fluctuations do not cause financial strain or make the investment unfeasible.
