Euro Owners Can Cancel Out Some Asset Depreciation

Posted by urbandigs

Tue May 18th, 2010 12:52 PM

A: Some food for thought. Lets look at how a foreigner using Euros to buy Manhattan property, all cash, has fared in the past 2 years.

Two years ago the world was quite different than it is today; and all the stuff in between was a roller coaster ride to say the least. Looking back two years, Manhattan sales prices had not yet fallen off a cliff (pre-Lehman failure), stocks were on their ways to the March 2009 lows, and the Euro was trading near its highs against the dollar.

So, lets see what happened to a foreigner who used Euros (the more local currency used, the higher the effect) to buy a Manhattan pad before the crash and see how the currency moves alone may have canceled out any asset depreciation. Lets use a $1.5m apartment as a hypothetical example, and lets keep this simple - leaving out transaction costs and other purchase expenses that would make this buy-sell more costly.

Euro Investor Closes on $1,500,000 Manhattan apt Purchase May 18th, 2008 (Pre-Lehman)

The Purchase --> It cost this investor E966,744 to buy the $1.5m Manhattan Property (E1 = $1.5516 at the time)

Euro Investor Closes on $1,200,000 Manhattan apt Sale May 18th, 2010

The Manhattan Market Adjusts Lower --> Post-Lehman, the Manhattan market froze up and adjusted lower. Lets assume a depreciation of 20%. The original $1.5m apartment now receives bids topping out at $1.2m

The Sale --> The US Dollar rose substantially against the Euro since the purchase (E1 = $1,2367 today @ 11:06am). The Euro investor sells the Manhattan property for $1,200,000 which now converts to E970,324.

Although it cost this investor only E966,744 to buy the $1.5m property, the recent currency appreciation in dollars offsets the 20% depreciation in the property since the original purchase Pre-Lehman, and a bit more. The euro investor now gets E970,324 back when converting their stronger dollars to their local currency. This example clearly does not include transaction costs to buy or sell, and only goes to show you how dramatic the recent currency moves have been. As discussed earlier this month:

"...the volatile currency moves are resulting in a decline of purchasing power for those foreigners converting Euros to Dollars when closing their transaction. On the flip side, this could make previous Euro investor-owners holding Manhattan property more inclined to sell to take advantage of the currency rise in their dollar based asset - especially if they bought near peak and are expecting to take a loss. The loss in the trade of the asset might be offset by the recent gain in the dollar against their local currency."


Interesting indeed. I really wonder how many Euro investors originally put money to work in Manhattan real estate as a hedge against the decline of their own currency?

UPDATE: Updated the math on the 20% discount in hypothetical example. Sorry, my bad.

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