Rubles, Reals and Real Estate

As commercial real estate brokers we are always being asked “What do you see for the future of Miami real estate”? Simply put real estate values and prices are a function of supply and demand just like any other product in the market place. As the demand increases and the supply remains constant, prices will rise. If the supply increases with no increase in demand, prices will decline. The real question is “When will the supply outpace the demand?” What we know is that we will see an increase in supply because of new construction. Another possible factor that may increase the supply of real estate for sale will be the exchange rate between foreign currencies and the US dollar.

One major factor impacting the real estate market has been foreign investors purchasing US real estate for reasons of both flight and fright. The flight purchases are made to secure an investment in a secure economic system. Fright purchases are made because the US provides a safe, crime free physical environment to live and raise a family.

Many purchases were made prior to 2010 when the exchange rates for foreign investments was very favorable and prices here in Miami we still relatively low. A Brazilian purchaser in 2010 would need 1.5 Reals to purchase 1 US dollar. Today this same purchaser will need almost 4 Reals to purchase 1 US dollar. A Russian purchaser in 2010 would need 30 Rubles to purchase 1 US dollar and today would need at least 80 Rubles to purchase 1 US dollar.

If these foreign buyers purchased real estate such as land or residences which require annual payments for real estate taxes and maintenance, the cost today to buy the US dollar to make the payments is many times more expense in terms of the local currency. This should decrease the demand by foreign buyers to acquire non-income producing real estate.

However, consider the reverse of the exchange rate. The condo purchased for $100,000 USD in 2010 for 150,000 Reals, if sold today for $100,000 USD could be converted into 400,000 Reals. So even if the price of the condo did not increase the exchange rate would generate a profit of 400%.
The impact of this favorable exchange rate may have the effect of stimulating foreign owners to sell their US investments and exchange US dollars for the local currency. An alternative is for foreign owners to convert their residences or second-homes into rentals, driving up the supply of rentals and impacting rental rates.

While all this makes sense from a numbers perspective, there is another side to every coin. Since the increase in the exchange rates is a reflection of the economic and political conditions and many owners may decide to keep their investments in US dollars and assets, because they currently have no desire to hold their own countries currency. So until such time as foreign countries become more stable expect owners to maintain their US investments.