The purchases of luxury homes by Indians in London during the quarter ended March 2017 were significantly cheaper as compared to the same period last year, owing to the strengthening value of the rupee against the Great Britain Pound according to the Knight Frank Global Currency Report 2017.
The report gauged the impact of currency movements for international investors purchasing luxury residential properties in key cities across the globe.
The weakening of the British pound in the wake of events such as Brexit made properties in London over 14 per cent cheaper for the rupee-denominated investors. As a result, Indian investors had the second-highest purchasing power for properties in London, only behind the Russian Ruble-denominated investors. “For the latter, the difference in prices courtesy currency fluctuation was a staggering 28.3 per cent,” according to the report. The currency value-induced discount for the rupee-denominated investors was higher than Australia (11.7 per cent), United States (11.6 per cent), China (5.8 per cent) and Europe (5.6 per cent).
“Traditionally, Indians have had a penchant for buying properties in London. Over the past couple of years, the Indian currency has significantly strengthened against major global currencies on the back of some significant reforms. Geopolitical developments in the UK starting from the Brexit had its bearing on the property market with decline in prices close to 6 per cent. Until the March 2017 quarter, the Indian currency appreciated by 14.1 per cent against the pound in comparison to the same period last year. But when compared to June 23, 2016, the day of the Brexit referendum, the Indian currency was stronger by 18.7 per cent until Q1 2017. That explains why Indians now regard property purchases more attractive in London,” said Samantak Das, chief economist and national director, Knight Frank India.
A parallel analysis of property prices in London between January 2016 and December 2016 showed that luxury homes in the British capital was 20.4 per cent cheaper for the rupee-denominated investors. This study accounted for the decline in property prices in addition to weakening of the GBP. Similarly, the report identified key international buyers in six global cities and highlighted the extent to which currency shifts over the last year (between Q1 2016 and Q1 2017) have influenced purchasing power. In Hong Kong, for instance, the Australian dollar- and Russian ruble-denominated buyers found it cheaper by 0.4 per cent and 19 per cent, respectively, while those with Singaporean dollar, Chinese yuan and British pound found it more expensive by 3.1 per cent, 6.3 per cent and 12.9 per cent, respectively.
According to the consultancy firm, currency, ownership costs and taxation are becoming increasingly crucial considerations for investors, especially as the rate of price appreciation slows in some global city markets. “However, individuals need to be conscious of the risks, as well as the opportunities, surrounding these.
“The volatility observed in currency markets over the last 12 months is a case in point,” a statement said.
Fluctuations in currency markets can impact demand for residential property from international buyers. To judge the strength of a country’s currency relative to its peers, Knight Frank have looked at effective exchange rates, rather than simply measuring one currency against another. This enables it to see in which direction a particular currency is moving in comparison to a weighted average of a basket of other major currencies.
Between June 2014 and January 2016, the US dollar appreciated by 21 per cent, making it more expensive for international buyers to purchase in the US. In recent years, the strong dollar has had a notable influence on non-resident purchases in the United States. This link between currency and crossborder transactions is underlined by data from the National Association of Realtors in the US, which show that the appreciation in the dollar between 2014 and 2016 coincided with a 25 per cent fall in non-resident property purchases across the United States. Purchases by American residents increased by 10 per cent over the same time period.
Investors might look to hold out for the most optimal time to buy or sell in an attempt to maximise purchasing power or potential returns. However, this strategy can be risky. The trading volume of the global forex market is estimated to be over 25 times that of global stock markets; this naturally leads to volatility and, therefore, carries risk when deciding whether the exchange rate has reached a peak or trough. Interventions by the central banks and policymakers in currency markets, according to Knight Frank, can devalue currencies.
To hedge against the impact of devaluations, buyers may look to invest in currencies which have a negative correlation to their local currency.