Ask anyone in the international property industry where your clients should be looking to buy abroad and it’s likely that everyone, from estate agents and mortgage lenders to solicitors and currency brokers, will all have a different opinion.
Fuelled by TV programmes such as A Place in the Sun, and the international property press, the demand for international real estate from British buyers has never been higher. Figures from the Office for National Statistics (ONS) show the value of foreign property ownership now stands at just over £23 billion. This number has doubled since 1999/2000. Furthermore, figures from the Survey of English Housing show that 194,000 second homes were owned abroad by English households in 1999/02. According to the ONS, the number of Britons owning second homes abroad now stands at 257,000.
At present UK overseas property ownership is concentrated in Spain (35 per cent), France (24 per cent) and Florida (5 per cent) which are historically the top three places for Brits to buy abroad. However, although Spain remains the number one place for Brits to buy abroad, we’ve noticed new emerging hot spots, in particular Dubai, Bulgaria, Cape Verdi and Eastern Europe as investors become more adventurous.
Principles and advice
Wherever your clients are buying property, the same principles and advice apply.
Remind them to do their research. Tell them to pick their destination carefully. What are they going to use the property for? If it’s a holiday home, how easy is it going to be to get there? Is there more than one airline route in case one shuts down? Nothing beats pounding the pavements. You’ll be surprised how many rational people buy property without having even visited the area.
Always ensure your clients seek specialist advice from independent solicitors, architects and surveyors before considering a purchase overseas. They should be proficient in your chosen country’s laws and processes and also know the specifics involved in buying a property there. Generally we recommend not to go with a lawyer that the estate agent or developer recommends. If either are unscrupulous, chances are the lawyer will be working in conjunction with them and will tell your clients what they want to hear, not what they need to hear. Personal recommendations are always the best.
Make sure they never sign a contract that they don’t understand (for example – if it is in a foreign language). If they’ve seen a ‘must-have property’ and are tempted to put down a deposit there and then suggest a ‘cooling off’ period. Make sure they take their time; this is a huge purchase.
If you are arranging finance on the property, ensure this is stated in any contract and your clients have an ‘opt-out clause’ if the loan is not agreed (which will ensure any deposit paid is refunded). Arrange any mortgage finance ‘in principle’, before your clients agree to purchase the property, or before they sign any contracts and pay over a deposit.
Make sure they carry out a survey. I know it seems obvious, but 75 per cent of Brits don’t bother when they buy abroad. In some countries it can be difficult to track surveyors down, but make sure your clients persevere. An initial outlay of £500 could save them a whole heap of trouble later.
Remember that bills do not end at the asking price. Solicitor’s fees, taxes, and insurance, etc, must all be met by your client in the host country and can often work out to be more expensive.
Impact of currency fluctuation
Don’t forget the impact fluctuating exchange rates can have on the price of their property. On average it takes between six and eight weeks to complete a property purchase abroad. Even over just one month currency rates can change dramatically and have a real impact on the price of a property abroad. In December 2005 alone, the value of the euro increased by 3 per cent against the pound. This would equate to a loss of 6,000 euros on a typical 200,000 euro property in Spain. If your clients were buying off-plan, the average purchase time rises to between six to 24 months. In the 12 months between the start and the end of 2005, the euro increased by just over 10 per cent, equating to a loss of 20,000 euros on the same property.
When it comes to transferring the money, make sure your clients shop around. A recent survey undertaken by the Sunday Times, found that the high-street banks are, in effect, charging up to 4 per cent over the odds for the currency exchange. In addition to providing better exchange rates, currency specialists will also talk your clients through the various currency strategies open to them.
Essentially this currency strategy is semi-dependent upon whether your client has access to all or part of the money required for the purchase at the outset (they may be financing part of the purchase with a remortgage of their UK home or awaiting the proceeds of share sales, etc).
If they have full funds available they have two choices: one ‘risk free’ and one ‘high risk’.
The ‘risk free’ solution would be to buy all of the euros now, thus fixing the cost at the outset (because they will not only know the price of the villa but also the cost of the euros to pay for it). This is called buying currency for ‘spot’. They can then deposit the bought currency to earn some interest and send payments to the developer as requested.
Those who ask, ‘what about the lower interest I will earn on my euros compared to my sterling?’ should look at the recent volatility of sterling against the euro.
The ‘high risk’ strategy would be to buy the euros each time they are required to send them to the developer. This means they have no idea what the property is going to cost, which could induce some sleepless nights ahead, especially if they are on a tight budget.
Forward contracts
But what happens if your clients want to ‘play safe’ but do not have all of the money at the outset?
There is a solution that is used daily by international businesses to protect their profit margins: buy one or more ‘forward contracts’.
In essence, a ‘forward contract’ means
you can buy the currency now, and pay for it later (when you need to make the individual stage payments). You will be required to pay a 10 per cent deposit now and the 90 per cent balance upon the maturity of the contract. For example, if you wish to buy £50,000 worth of euros but do not need to send them for three months, you can agree the exchange rate now, place a £5,000 deposit, and pay the remaining £45,000 balance in three months. If the exchange rate moves at all in that three-month period this will not affect you at all, as you have bought currency at the originally agreed rate. You may actually fix a rate on all your currency requirements up to 18 months forward.
If you have strong views about future exchange rates, you could wait to buy your currency at some stage between agreeing to purchase the property and the date that currency is required. This applies to either buying (and paying for) all of the currency (a spot trade) or fixing a rate (a forward contract). Either way you are exposing yourself to currency risk.
We always remind people that they would never agree to buy a property in the UK if they did not know how much it was going to cost them; if you agree to buy an overseas property without fixing the exchange rate at the outset, that’s exactly the gamble they are taking.
