The currency factor and Istanbul real estate… A carry trade?

The importance of currency levels will be a well-known point to many international real estate investors. And that attests to its importance.

The world goes round

The world goes round

When we use dollars, euros or the GBP to purchase a property in Istanbul, for example, what we are most likely implicitly hoping for is that the Turkish Lira strengthens against the currency used for purchase. Of course, at the time of purchase we would be hoping for a weak TL.

This is, in fact, what has occurred over the past year and a half. İn 2011 the TL was the worst performing emerging market currency, to firm slightly in 2012.  As it is still off 25% on historical averages against the USD, this represents a significant buying opportunity. As İ have said before, there is a giant For Sale sign on the garden of Turkish real estate, and Turkish assets more generally. This kind of opportunistic purchase could be viewed as a carry trade of sorts. İn the local press, there is an ongoing story about Mrs. Kobayashi, a stereotyped  Japanese housewife investor who has a fondness for buying Turkish Lira, which offers a high interest rate. Not too surprising, considering that Mrs. Kobayashi would receive pretty much zero percent if she left it in a Yen savings account. She converts that yen to Tl and gets a relatively handsome interest rate and prays also that the TL performs well against the Yen. İf that occurs, dear Mrs. Kobayashi will have done very nicely. Not without risks, but a popular currency move, nonetheless.

Mrs Kobayashi when she's not do the school run

Mrs Kobayashi when she’s not doing the school run

So, in the ideal Turkish property investment scenario, you buy when the Tl is weak, rent out your property for 5 years, after which period capital gains are exempt, the Tl strengthens and you get good capital growth through purchasing wisely. İn this scenario, it will be an excellent investment. Though, it should be noted that timing is crucial. Most analysts would agree that if you are fully committed to buying property in Turkey, now would be as good a time as any to convert your currency into TL to take advantage of a weak TL ( a strategic devaluation by the Turkish Central Bank to remain competitive for exports).

On a cautionary note predicting the falls and rises of the currency markets is fraught with difficulties that defy basic economic understanding. The property bought should have its own investment fundamentals as relying on positive currency movements as the sole reason for investment would be a game plan that even the best analysts have difficulty predicting. To highlight – It is worth noting that a little over 4 years ago eminent economists were scratching their heads trying to understand why the dollar was strengthening when the world was falling apart… it is now taken as granted that the greenback jumps when the markets drop as it’s seen as safety of the last resort. Not many of the great and the good predicted that!

However, Turkey may just possess one of the few property markets where you can achieve a 100 % percent investment return over a 5 year period.
İ believe all pretenders in Europe have long since abandoned such optimism. To put it in to risk context, buying real estate in Istanbul is a good strategic safe investment without the currency upturn as the economy is bouldering along well, however, add in a bit of positive currency tailwind and you could have yourself a eye-popping return without the need of leverage!

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