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Convert a $3.2 million property loss to a $1.5 million gain

Posted by Property Launch Invest on Tuesday, 30 June 2015 in Property News

When an overseas buyer invests in a Singapore property, he (or she) is converting his home currency into Singapore dollar.

As such, he is taking a currency bet.

As you can see from Quadrant A in the Currency Bet Outcome graph, what the buyer wants to happen is for both the value of his property and the Singapore dollar to increase. If this happens, jackpot!

First, he makes money on his Singapore property. Then, he converts his Singapore dollars into his home currency and makes more money from the currency differential.

The worst outcome is Quadrant D. A drop in property value and a weakening of the Singapore dollar deliver a double whammy. Not only does he have less Singapore dollars than when he started, but he converts his Singapore dollars into less home currency.

The unknown outcome occurs when property value and the Singapore dollar move in opposite directs to one another. (See Quadrant C &D.)

Whether the investor comes out ahead or loses depends on which of the two variables had the stronger positive movement.

In order to illustrate, let’s look at a hypothetical transaction that was based loosely on an actual transaction in Sentosa. (The currency has been changed but the principles of the transaction are reflective of the actual situation. Also, the illustration doesn’t account for transaction costs, taxes, etc.).

In June 2012, a Japanese buyer exchanges 1.25 billion Japanese Yen (JPY) for $ 20.2 million and buys a house in Sentosa. (Exchange rate: 1 SGD = 61.96 JPY.)

Almost two years later, during the property market’s downturn, he sells the house at $ 17.0 million.

This results in a loss of $ 3.2 million (i.e., 20.2 minus 17).

He then changes the $17 million into JPY, which gives him the SGD equivalent of 1.37 billion JPY. (Exchange rate: 1SGD = 80.76 JPY.)

His net profit in Japanese Yen is 1.37 billion minus 1.25 billion or 120 million JPY, which is about $1.5 million.

In this case, despite the fact that he sold the house at a loss, he made a profit.

Source: 30th June Business AsiaOne

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PROPERTY LAUNCHES & INVESTMENTS

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Convert a $3.2 million property loss to a $1.5 million gain

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