Deborah Benn explains why fixing your currency exchange rate should be the top priority when considering a property purchase
For many investors looking to buy a second home or settle in the Caribbean, currency is not always high on the list of priorities. Attention to location and lifestyle are generally the two main drivers of that all-important decision. But if there’s anything set to spoil your Caribbean dream, then it’s lack of attention to exchange rate movements.
There are a number of currencies operating across the Caribbean islands. The currencies of islands such as Antigua and Barbados are pegged to the US dollar, whereas Jamaica’s currency is free floating. But generally speaking, for sterling investors, the cost of your property will be tied up with the fortunes of the sterling/US dollar exchange rate.
This means the movement - or volatility - between these two currencies will be the determining factor that decides how much you will actually pay for your luxury Caribbean bolthole. Remember, buying a property is a transaction that takes many months, so even currency movements of a few percentage points on such large sums of money can make a big difference. Taking a historic look at the exchange rate fluctuation between sterling and the US dollar gives some idea of what this can mean financially. Back in 2008, before the financial crisis hit, the exchange rate was £1/US$2. In financial terms this means a Caribbean property costing US$700,000 would cost £350,000. Since then, the exchange rate has fallen as low as £1/US$1.40, which adds another £150,000 on to the cost of your property purchase. You get the idea.
The good news is that going forward many see the sterling/US dollar exchange rate as remaining relatively stable. In particular, the European debt crisis has benefited the US dollar, according to Chris Towner, director of advisory at currency specialists, HiFX, the US dollar is currently seen as a liquid safe haven for investors and an easy currency to get in and out of. However, he does warn that in the second half of 2012, the US dollar may enter a further period of volatility once attention turns to domestic policies in the run up to the US elections.
Chris Saints, senior currency analyst at UK financial advisers Hargreaves Lansdown, says that initial results of a survey they are compiling on exchange rate movements show that that the majority of analysts believe the rate between sterling and the US dollar will stay below the £1/USD1.55 level, although this sentiment may change as the final results of the survey emerge.
Both Towner and Saints say property buyers often prefer to ‘hedge’ out the risk of currency movements going against them by buying a forward contract that effectively locks in sums of money at a specific rate. This gives a level of certainty as to your costs and can be done as far as two years in advance, according to Saints.
While the US dollar is the main focus for investors buying property in the Caribbean, it’s important not to overlook any added layer of risk that comes with the need to take into account any Caribbean currency, concludes Towner.
