In this article, we explore the issue of foreign exchange risk when buying property in a different country. Whenever an overseas property transaction is settled over an extended period, and the buyer holds funds in a different currency to the pricing currency, the impact of currency movements must be considered carefully. In many overseas markets, particularly in developing resort destinations like Phuket and Koh Samui, it is common for settlement to take place over an extended period, as a large proportion of stock is either bought off-plan, sold before full completion, or built independently by the buyer. In short, a far lower percentage of properties are bought and settled in a single payment compared to more mature or domestic property markets. Whether dealing with staged payments linked to construction milestones or agreements involving land sellers and construction companies, investors are exposed to exchange rate risk throughout the settlement period..
What is Exchange Rate Risk When Buying Property Overseas?
Exchange rate risk exists when the property price is denominated in one currency, and the buyer’s funds are held in another. Rather than making a single upfront payment, buyers often transfer money in stages – whether linked to construction progress, land purchases, or development agreements. Currency values continually fluctuate, and if the buyer’s home currency weakens against the pricing currency during this time, the total cost of the investment will increase, making it crucial for overseas investors to manage this risk carefully.
How Settlement Price Is Determined by Exchange Rates
To illustrate how exchange rate fluctuations can impact the cost of an overseas property, let’s consider the case of a buyer purchasing land in Koh Samui, Thailand and building their own house over a one-year period using a local Thai contractor.
The total budget for the project is 20 million Thai Baht (THB), consisting of 5 million THB for the land purchase and 15 million THB for construction. The buyer holds their funds in British pounds (GBP).
At the time of purchasing the land, the exchange rate is 45 THB per GBP. Based on this rate, the buyer originally estimated their total project cost at 444,444 GBP (20,000,000 ÷ 45).
The buyer pays 5 million THB for the land, which equates to 111,111 GBP (5,000,000 ÷ 45).
Construction is scheduled over 12 months, with staged payments tied to construction milestones. Let’s assume that they currency valued over the 12 month period and the instalments due were as follows:
- 20% to start construction (3M THB) – Exchange rate: 45 THB per GBP → 66,667 GBP
- 20% upon completion of foundations (3M THB) – Exchange rate: 44.5 THB per GBP → 67,416 GBP
- 20% when construction reaches roof height (3M THB) – Exchange rate: 43 THB per GBP → 69,767 GBP
- 20% upon completion of the roof (3M THB) – Exchange rate: 42.5 THB per GBP → 70,588 GBP
- 15% upon completion of interior work (2.25M THB) – Exchange rate: 42 THB per GBP → 53,571 GBP
- 5% upon handover (750K THB) – Exchange rate: 41 THB per GBP → 18,293 GBP
Summary of Costs:
- Land Purchase: 111,111 GBP
- Total Construction Payments:
66,667 + 67,416 + 69,767 + 70,588 + 53,571 + 18,293 = 346,302 GBP
Overall Total:
111,111 + 346,302 = 457,413 GBP
If the exchange rate had remained constant at 45 THB per GBP throughout the project, the total cost would have been 444,444 GBP as originally estimated.
Instead, due to the weakening of the pound against the Thai baht during the construction period, the buyer ends up paying approximately 12,969 GBP more than planned.
Even relatively small movements in the exchange rate can add thousands to the overall cost of a property project. In this example, the additional amount paid could easily represent the budget a buyer might have allocated for closing costs such as legal fees, land registry charges, and taxes, highlighting why managing currency risk is essential when buying or building property overseas.
How You Can Manage 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: Key Considerations
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.
