Debbie Baum | Dealing with the weak dollar

Dealing with the weak dollar

REurope 1-1-05

By: Theodore Murphy
Published: 1/1/2005
Source: REurope

Encouraged by the declining currency value, foreigners are moving into American residential property in their droves

Herve Villeneuve pours burgundy for himself and his guests, walks across the small living room to the window, points out, faces the center of the room and sighs,”Just look … I love my view of the Empire State Building.” He inhales the bouquet, sips the wine, swishes it about, swallows, takes a deep breath and exhales, “And I love the weak dollar!”

The French corporate lawyer’s enthusiasm is common right now among acquisitive foreigners throughout the United States. As the dollar has slid from its February 2002 peak, foreigners with revenues or assets in stronger currencies have used the enhanced purchasing power to snap up an increasing number of residential units in the US. Villeneuve – who spends about three months of the year in New York and most of the rest in Paris – picked up his one-bedroom apartment in the Gramercy district for $685,000. “I wasn’t planning on buying here, but the exchange rate made the opportunity irresistible,” he said, after noting that he is paid in euros. New York brokers are dealing with hundreds of buyers like Villeneuve. “We’ve seen a marked increase in the number of international buyers looking for property in Manhattan,” said Debbie Baum, a broker with The Corcoran Group, one of New York City’s leading real estate agencies.

Baum is in the final stages of closing deals with two investors from Hong Kong and one from Spain. For one of the Hong Kong investors, this will be his second apartment in New York – he sold the first one at a tidy profit. The other’s interest was piqued by the exchange rate, Baum explains. The Spanish buyer picked up a flat for $1.5m – “During the negotiations, he went higher than he expected, allowing himself to do so because of the favorable exchange rate,” said Baum. An investor from Australia who wants a small apartment recently contacted Baum. “Friends are telling friends that this is a good place to put their money,” she said.

Baum’s colleague Wendy Maitlind concurs. “I put a $4m loft on the market in late October and within a month received an offer from a Dutch businessman. I’m also working with a number of Italian, Russian, British, Irish and Israeli buyers. The higher priced properties are more attractive to foreign buyers because they are getting them for 80 cents on the dollar,” she said.

Al Horrigan of RSVP associates in Florida uses a similarly rosy calculation. “It’s easy to do the sums. My clients pay half the number of dollars in pounds,” he said. With a single pound buying nearly two dollars, Horrigan said he has seen a “great influx of people coming in from the UK,” and noted that sales have accelerated in recent months due to dollar devaluation. “The first words out of their mouth are, ‘the dollar is weak and we are going to do some buying while we can.'”

While The Corcoran Group and RSVP keep client information confidential, a number of recent property sales to foreigners, particularly in Manhattan, have been widely noted. A growing number of tenants of the new high profile condos in the Time Warner Center have come from abroad. Susan de França of the Related Companies, the Center’s developer, said that since the winter of 2003, when foreign buyers began to react to the dollar’s downward trend, “The proportion of foreign buyers has gone up 10%.” The father of Russian aluminum heiress Anna Anisimova recently bought her a $15m condo in the Center. He’s also funding another daughter’s house hunt. David Martinez, a Mexican-born, London-based financier, bought the Center’s most expensive apartment for a record $42.5m. At printing, a rumour is circulating in the broker community that Australian media tycoon Rupert Murdoch is about to beat that mark by purchasing a Park Avenue triplex for $44m. Most international buyers are in the market for a residence to use for much of the year or during multiple business or leisure trips, but a growing number view residential properties solely as investments. The Corcoran Group are dealing with a clutch of foreigners interested in buying lofts and apartment buildings in Manhattan and Brooklyn for renovation and rental. Horrigan, the Florida broker, expects that many of his buyers will sell if the dollar strengthens past $1.50 to the pound, taking equity on the currency appreciation of their assets.

These international deals come amid growing concern that the US housing market – after nearly nine years of price appreciation – could be headed for an ugly downturn. As the US budget and current account deficit continue to expand, a growing number of economists are concerned that, due to declining confidence, vital foreign demand for US Treasury securities might suddenly plummet. In order to attract the liquidity needed to finance national debt, then, policymakers would raise interest rates – perhaps just as suddenly. Some economists foresee a scenario in which a sharp rise in interest rates provokes a dip both in home prices and sales volume. Dean Baker of the Center for Economic and Policy Research, a Washington think-tank, compares the housing price situation to that of the unsustainable stock prices of the late 1990s. “The fact that there has been an unprecedented run-up in home prices over the last eight years creates the possibility for an unprecedented decline in the years ahead – just as the spurt in the NASDAQ at the end of the 1990s created the basis for its plunge after March of 2000,” he said.

But central bankers often chide those who seek to draw macro-level conclusions from the a highly fragmented real estate market. In the housing business, where location is paramount, concerns over nationwide trends are often dismissed out of hand. In a recent speech, Federal Reserve Chairman Alan Greenspan noted, “Overall while local economies may experience significant speculative price imbalances, a national severe price distortion seems most unlikely in the United States, given its size and diversity.” Many local housing professionals take comfort in assuming that they are on the right side of that diversity – that their market will be among the least affected in the event of, say, a sharp and sudden rise in interest rates. “Let’s face it,” said Pablo Montes, a broker at Corcoran, “New York City is the capital of the world. People want property here because it is the best place to live, work and play. No matter the economic conditions, there are always good reasons to buy here.” Horrigan points out that demographics and expanding awareness are on his side. “Every year, all over the world, more people are retiring; every year, more of these retirees have been turned on to the comforts and pleasures of Florida.”

Nonetheless, holding other variables constant, if it is true that international demand for US residential property has in part been boosted by favourable exchange rates, it must hold that this part of the demand will fall if and when the dollar reverses course or stabilises. Citing a lack of political opposition to a weaker dollar, a recent JP Morgan report estimated the dollar will continue to slide gradually against the euro from a value of nearly Û75 at printing to Û72 by the summer of 2005, when it will bottom out. Looking further out, at a recent conference, Edwin Truman, a former assistant secretar of the Treasury for international affairs, said that the dollar would probably weaken by 25 percent over the next three to four years. But the wax and wane of currencies is never easy to predict, and home buyers and brokers don’t always agree with economists, government officials or even each other when it comes to forecasts. “My conversations with my clients are centered on the idea that the dollar is at a dramatic low which cannot be sustained for a very long time,” said Horrigan. Villeneuve, in his new apartment, with his arms spread wide, eyebrows arched and raised and eyes twinkling, eschews that projection. “I’m starting to think that the dollar will fall a lot more and stay down,” he said, “If it tanks, I’ll treat myself to a better view and at least one more bedroom … and maybe even enough room for a wine closet.”