Currency risk when investing across borders

Buyers often choose a country and then discover they have also chosen a currency. Rent, service charges, tax and a future sale are paid in the unit of that place. If the owner’s life is priced in another unit, the exchange rate is part of the result. This note separates that exposure from the building. It does not forecast a currency.

Three currencies

The first is the currency of the income and the costs. A rent in ringgit and a service charge in ringgit are a Malaysian cashflow even if the marketing used another currency. The second is the currency of any debt. A loan in a different unit from the rent is a second exposure: the payment can rise because the rate moved or because the exchange rate moved. The third is the currency the owner eventually spends. A rent that is earned and spent in the same unit is a smaller problem than a rent that must be converted to fund a life elsewhere.

The exchange rate can dominate the local price

House-price indexes, including the BIS residential series, are usually in national currency and sometimes adjusted by that country’s consumer prices. They do not answer what the holding is worth in the owner’s currency. A rise in the local price and a fall in the currency can leave a foreign owner worse off. The reverse also happens. Neither is a property fundamental. It is the price of money.

What institutions can do, and a single flat cannot easily copy

Banks, funds and treasuries hedge currency with forwards and other contracts, at a cost, for a period, and with a counterparty. A household that owns one apartment rarely has the same tools, or the same ability to post collateral if the hedge moves. Borrowing in the currency of the rent matches one of the three exposures and leaves the spending currency open. Holding cash in the owner’s currency matches spending and leaves the asset exposed. There is no structure in which all three are hedged by the building itself.

Interest rates sit inside this. The Bank of England and the European Central Bank set rates for their own economies. A higher rate at home and a lower rate where the building sits changes both the financing and, over time, the exchange rate that markets will trade. The path is not mechanical. It is enough to stop treating ‘overseas property’ as a way to step outside currency.