Exchange advantage

23 January 2009, Financial Times

By Faith Glasgow

The dramatic slide of sterling against the euro and other currencies since the start of last year has created big winners and big losers in the world of residential property. In the former category are international buyers in the UK, and especially in London, who are combining falling prices with improved exchange rates to secure deals that cost them 40-50 per cent less in their own currencies than they would have a year ago. In the latter are British buyers abroad, who can no longer afford the gîtes and haciendas they once coveted or have found themselves struggling to cover the monthly payments on their foreign-currency-based mortgages.

Sammy Abd Kerim, an Egyptian businessman based in Cairo, is among the fortunate ones. He started looking for a London apartment in the summer of 2007 through estate agency Kay & Co and quickly found an ideal three-bedroom property on the third floor of a grand block overlooking Hyde Park. “I come to [the city] four or five times a year so I felt it would be good to have a base where I could stay and bring my family,” he explains.

He offered £2.1m for the flat, slightly below the asking price of £2.35m, but London’s prime market was still bubbling at the time and the seller rejected it. “I walked away at the time and continued to look around,” Abd Kerim says, “but in autumn last year the sellers reduced it to £2.1m and we picked up our discussion. Now I am expecting to pay £1.9m, which amounts to a reduction of almost 20 per cent on the original asking price.” Even more importantly, since the Egyptian pound gained 26 per cent against sterling in 2008, he saved another £500,000.

He acknowledges that the flat’s value might fall further over the next few months but still thinks now is the right time to buy. The market “may lose another 5 per cent but no more and prices will rise again in due course”, he says. “I don’t feel the need to wait longer. Even if the market falls another 10 per cent, I have saved a great deal of money on the currency exchange. In fact, I am thinking of using it to invest in a second flat to rent out, as a bonus.”

Estate agents in the UK say such attitudes are increasingly common and are now resting their hopes on buyers like Abd Kerim to kick-start sales. They expect the most interest to be in areas and segments of the London market that have been hit hardest by City redundancies, including Kensington, Notting Hill and Holland Park (where Savills says prices fell more than 11 per cent in the past quarter) and in the £1m-£2.5m price range (where Knight Frank estimates average declines at 22 per cent since the peak). They say there is rising interest not only from the Middle East – with buyer numbers up 70 per cent from the end of 2007 to the end of last year, according to Knight Frank – but also from Europe, since the euro gained 30 per cent against sterling in 2008; the US, with the dollar up a relative 35 per cent; and Asia, with the yen up 66 per cent.

“People who stopped looking in 2007 because prices were ludicrous are returning,” says Martin Bikhit at Kay & Co. “Even our toughest, pickiest clients are now seriously looking around because they recognise this is a limited window of opportunity. Two years ago only 20 per cent of our work came from international buyers; now I guess they account for 80 per cent.”

Camilla Dell at property search agency Black Brick confirms the trend. “We’re seeing a big increase in Middle Eastern, African and other dollar-linked buyers, who are now showing strong renewed interest in the London market as a great investment opportunity,” she says.

Commentary from Julian Sedgwick at Jones Lang LaSalle highlights an influx of south-east Asians trying to take advantage of “a clear competitive buying advantage” – with “one particular high-net-worth family in Singapore already [allocating] just over £100m to invest in London prime residential and commercial property over the next 12 months” – while Charlie Parkin at Aylesford has noticed a surge in interest from Italians, thanks to euro strength and extensive coverage of the UK capital’s suddenly affordable homes in their local press. “Unlike some other Europeans, they also really like investing in real estate,” he adds. “They consider it to be safer than the stock market.”

Buying agent Charles McDowell of McDowell Properties says he’s also working with “three or four” European clients who “now regard London as the place to be, since they can buy in effect at half price compared to 18 months ago” and with two Americans who “feel the same”. In the latter category is John Wilson, who is relocating from Los Angeles to run a finance company and now looking for a place to live in Chelsea and Kensington. “We are now more inclined to buy rather than rent but we are cautious on price,” says his wife, Mary Lou. “We don’t want to be caught out as we were in the 1980s in California, where values dropped by 60 per cent and took 10 years to recover.”

Indeed, most international buyers are looking for deep discounts. But their presence is nonetheless good for British sellers who intend to buy into the same depressed market and, eventually, it will benefit British buyers as deal-flow picks up and spreads. “The start of the recovery may well be driven by [these] investments,” says Savills’ research director, Yolande Barnes. The precedent is 1993, when, after a disastrous year for sterling, Middle Eastern, European and American buyers revived a collapsed London market.

Meanwhile, at the other end of the widening currency divide are Britons with holiday homes and mortgages abroad. Take Anne Parry, director of a regional PR company in the UK, and her business partner, Edward Carter, who in 2006 bought a two-bedroom apartment in the Vilamoura resort in Portugal’s Algarve region. They paid €266,000, plus the cost of a fit-out, and covered about 60 per cent of it with an interest-only mortgage from a Portuguese bank.

Unlike elsewhere in Europe, the resort has not yet seen property price depreciation, with similar apartments recently selling for €330,000. As a result, Parry, who uses the property herself a few times a year, and Carter still believe in their investment. “It’s in a great location, with two of the best beaches in Europe and seven championship golf courses nearby, and [it] will gain value when the nearby marina development is extended,” she says. “Over the long term we’re not losing because the property is valued in euros and so has gained value in sterling terms,” he adds.

But they acknowledge that the currency swing has caused them headaches. “We are only paying 3 per cent [on our mortgage] but when we started we were getting €1.45 to the pound and now we’re getting around €1.06, so it’s costing us 27 per cent more to service,” Parry says. Plus, the economic crisis has also made securing holiday rental income more difficult. “We aim to cover our mortgage interest and outgoings through letting but we’re really having to be very proactive about marketing at present.”

There have been a few holidaymakers from Ireland and Portugal, who pay in euros, but most are sterling-paying Britons, whose money has to be converted back to euros before the bills can be paid. To make matters worse, as with buyers in the UK, everyone is looking for a bargain. In order to stay competitive, Parry admits, “we’re not setting the rent to reflect our full increased costs”.

Still, the pair are sticking to a long-term view. “We’ll hold [the apartment] at least until the marina development is complete,” Carter says. “I think sterling will strengthen in due course so this is a low period and we’re looking beyond that.”

Currency exchange companies such as Caxton FX and FairFX report that many British homeowners in Europe are less sanguine, however. Some who never intended to let their condos and villas are now doing so as a way to offset costs, while others are selling up, trying to take advantage of the euro’s strength, particularly if the economic downturn has not yet pulled their property values below the levels at which they bought. For example, one Caxton client bought a house in France with cash in 2002 when £1 was worth €1.62, then sold last autumn, when the ratio was £1 to €1.12. His gain on the sterling purchase price was £140,000, with more than £100,000 coming from the currency trade.

If that is one silver lining to the euro’s strength, another is that European developers are also now offering “generous discounts” to sterling buyers, says James Hickman of Caxton FX. “Others have introduced a scheme where buyers pay a small deposit but then defer the rest of the payment for up to five years and pay only interest on it meanwhile,” he says.

Julian Cunningham of estate agency Knight Frank confirms that such “solutions” are increasingly common. “It depends on the developer’s situation but typically at least 75 per cent [of the purchase cost] is postponed,” he says. “That gives buyers time to plan their finances. It’s not a new initiative but now it’s a key element of any deal.”

Buyers eager to bag a holiday home bargain while European markets remain depressed are also getting creative themselves. “A couple of recent British purchases have gone through where, instead of converting their pounds at an unfavourable rate, the buyers opened a sterling interest-bearing deposit account with a Spanish bank,” says Barbara Wood of The Property Finders in Spain. “Against this, they took out a personal loan in euros to pay the sellers. The difference between the interest earned on the sterling deposit and the interest on the loan costs them about 1 per cent. But they can wait until sterling recovers and then convert their funds and pay off the loan…”

In the end, second home purchases abroad are lifestyle decisions as much as investments. Culture-hungry jet-setters tend to crave pieds-à-terre in London whatever the cost, while Britons keen on warm-weather sailing, golfing and surfing will always dream of their own places in the sun. But until prospective buyers engage in substantial and prescient hedging – locking in attractive exchange rates through forward contracts – currency swings like the ones we saw last year will continue to have dramatic fall-out around the world.

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