Foreign currencies in real estate

It has been a few years since international investors have been the ultimate source of revenue of Miami’s condo market. However, it is getting more and more expensive for them to purchase units in Miami-Dade, Broward and Palm Beach.

The main reason why buying resale units as well as preconstruction condos in Miami is increasingly costly for foreign investors is the strengthening of the US dollar. Added to the booming real estate market in Florida, it leaves international buyers with fewer investment opportunities.

Indeed, currency exchange rates have collapsed in 2014 compared to the US dollar that has gained value. Frequent buyers from Argentina or Brazil have seen their currency shrink by respectively -31% and -10% in the past year. For now, only British and Chinese investors have not been penalized by a decrease in their currency compared to the US dollar.

Let’s have a look at the market to see how impactful of a situation that is. The question is: For how long are we going to observe gains in Miami’s real estate market both in terms of amount and values of transactions ?

The local market is progressively dividing itself into 2: the resale market and the preconstruction market.

Let’s first have a look at the resale market. The current average price for a condo resale in South Florida is $355/sqft. That is already an 88% increase from 2009, during the previous last real estate crisis. As a result of this progressive increase in price, 1525 units went under contract in 2014 as compared to 1650 in 2013. Even though fewer transactions are happening, owners are having a hard time reducing their condo resale prices. Hence the supply inventory of 8 months for these condos, knowing that a healthy market is said to have 6 months of inventory available.

Competing with the resale market is the preconstruction condo market in Miami. It contributes to the increasing supply of condo units on South Florida’s market. Indeed, among the 120 condo towers under construction in the area, the median price for the 16,000 units to be built is $772/sqft. This is a new real estate cycle that dates back to 2011. At that time, foreign purchasers started to enter presale contracts requiring 50% deposits. This very structure primarily targets international investors because domestic buyers would not want to commit over 30%. This way, developers optimize their cost structure without using financial leverage from lenders.

All that tends to underline the dependency of the Miami market on foreign buyers. Moreover, domestic investors usually prefer to buy with leverage whereas foreign purchasers are more into cash transactions which is more of a guarantee for sellers and developers… To that extent, the rise of the US dollar resulting in a decrease in their purchasing power and potentially in their withdrawal from South Florida could be worrying. Can domestic investors fill the empty gap that foreign investors are progressively leaving?