Real Estate

Rubles, reals and the Miami real estate market

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 marketplace. 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 U.S. dollar.

One major factor impacting the real estate market has been foreign investors purchasing U.S. 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 U.S. provides a safe, crime-free physical environment to live and raise a family.

Many purchases were made before 2010, when the exchange rates for foreign investments was very favorable and prices here in Miami were still relatively low. A Brazilian purchaser in 2010 would need 1.5 reals to purchase one U.S. dollar. Today, this same purchaser will need almost four reals to purchase $1. A Russian purchaser in 2010 would need 30 rubles to purchase $1 and today would need at least 80 rubles to purchase $1.

If these foreign buyers purchased real estate such as land or residences that require annual payments for real estate taxes and maintenance, the cost today to buy the U.S. dollar to make the payments is many times more expensive 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 in 2010 for 150,000 reals, if sold today for $100,000, 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 percent.

The impact of this favorable exchange rate may have the effect of stimulating foreign owners to sell their U.S. investments and exchange U.S. 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, many owners may decide to keep their investments in U.S. 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 U.S. investments.

Thomas Dixon is president of Dixon Commercial Real Estate specializing in commercial brokerage and tax assessment appeals. He was 2004 President of the Miami Association of Realtors.

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