Currency at work

As mentioned in another thread by @MTR I thought it best to start another thread on some recent purchases.

At the end of last year we had some cash available (about US$60k). We chose to purchase an OTP appartment on the outskirts of Moscow city. At the time the Unit cost about USD$200k - when the Rubble was at 33:1 agains the USD and a similar rate to the AUD.
We borrowed the remainder in Rubble at a fixed rate of 10%.

Wind forward to today and the Rubble has devalued to about 65:1 against the USD. Resulting in our loan amount being about 50% of what is was the day we took it out (in USD terms).
In the meantime the interest rates have gone to 18% (for new loans).
As a result appartment values have increased 30% (in rubble terms)
We looked to repay the loan, as we have the cash available.
Instead we took the opportunity to convert the USD cash into Rubble and buy again. We are in the process of purchasing another unit in the same complex which will be about $120,000 for a similar product.

So in summary
Unit 1 in ruble & (USD at time of purchase)(USD as at today)
Paid 6,000,000rubles ($200,000)($100,000)
loan 4,000,000 rubles ($140,000)($60,000)
deposit 2,000,000rubles ($60,000)(already paid)
Total cost $120,000 ($60,000 deposit & $60,000 current Loan).
Current value 7,500,000rubles ($120,000 at current exchange).

Given the de-valuation of the ruble, which effectivly halved our loan we decided to purchase another appartment.

Unit 2
Paid 7,500,000 ($120,000 @ current)
Cash 7,500,000 ($120,000 @current)

Net result at todays rates
2x units 15,000,000rubles ($240,000)
Loan 4,000,000 ($60,000)
Return. Each unit will be rented for approx 600,000rubles/month ($1,000).
Net return ~10%.

These units are located outside the city. At present there is a bus service to the nearest metro. However, the Metro service will open in 2017 (construction has begun) and the appartments will be about a 2min walk to the station.
We are anticipating a decent jump in prices when the metro opens.

What happens to the currency - who knows. It wont really concern us too much as we will paydown the current loan to nil - and will hold the appartments for the long term.

Blacky

 

Great post
How long will it take to pay these off?
Will you purchase more?


MTR

 

We will repay the outstanding loan in 12months or so - maybe less.

At this point no - this gives us 3properties in Russia its enough for now.

Blacky

 

Its good to have income in multiple currencies!

 

Will they settle? Has construction commenced? I thought most economies were running low interest rates policies, what caused them to double?

 

Interesting... What's your exit strategy? Are losns from Russian banks?

 

Doesn't that mean your capital has just halved in value though? Your loans have halved in value because of the devaluation but so has your converted US dollars, did the CG counteract the loss of capital?

My brain hurts from trying to do the maths.

 

Yep, I did not realise the power of this at the time I was buying in USA, absolutely no clue.
It can also work against you if the currency goes backwards and you need to cash in the chips.

 

The first is now complete and settled - we have the Act (title) in hand. We are in the process of getting furniture in preperation for renting it out.
Construction is well under way on the second - settlement is due mid next year, but will probably be late. Im expecting settlement prior to year end 2016.
But - Scott - yes this is a risk.

In regards to the second point - welcome to Russia. Russia is suffering at the moment due to a couple of things
1) oil/resources prices. A significant part of there economy is resource based.
2) US embargo's imposed due to the Ukraine fiasco.
In responce to this they are trying to drive foreign investment through high interest rates, and low exchange rates. This encourages spending on domestic products (as their currency isnt worth much internationally). And to drive local savings - a protection against bank 'runs'. If you can earn 10%holding cash, why invest elsewhere.
Russia is also trying to 'de-dollarise' their currency. Effectively a lot of trade is still conducted in USD (or at least negotiated in USD though paid for in rubles).
Not sure if any of the above is working as intended or not. One thing I like about Russia is Putin will do what ever he believes is good for the country - even if that means short term pain for all of its citizens. He has the balls to make very unpopular decisions.

We intend to hold these for the long term for the cashflow and diversification. Exit will be selling them and returning the money to USD when the conditions are right to do so.

Yes - however, the devaluation has also driven inflation. Its not completely offset, but has softened the impact. Had there been no devaluation the property value would have remained at about 6,000,000rubles or $200k. and our loan would still be $140k. No change.
The devaluation allowed us to purchase again, as our $$ buy more.

This is a fairly high risk play. When all is said and done we still would have invested +/- $250k into Russia. Which was always the plan. The currency has allowed us to have two properties instead of just one - for the about same money.
The risks for me are managed as my wife is Russian. No way I would have commited to this otherwise.

Blacky

 

Russia still has a policy of all purchases inside the country MUST be in Rubles. Putin recently brought this to the attention of the oil companies who were quick to issue an apology and promise to convert to Rubles before purchasing from USD in the future.

That means that resource transactions inside Russia will utilise the Ruble which means all of the EU's gas will likely be settled in Rubles - which accounts for a third of all the EU's gas and oil needs.

I expect the Ruble to get stronger as a result.

 

The policy actually goes further than just that. Previously a lot of contracts were based in a foreign currency (eg $USD), but paid in rubles using a mutually agreed methodology (such as the bank rate on the day of payment). Now - all local companies can only contract (and pay) in rubles.
International trade is a little bit more tricky, but yes, as you say basically everything inside the border has to be paid in Ruble.

To be honest Im not sure how the Oil/gas sale contracts would work - they may be excempt and be able to continue to trade in dollar or euro. However, there is a big push to 'de-dollarise' the currency.

Ive got no idea where the ruble will go - but I think the days of 30:1 are behind us. I hope I am wrong.

Blacky

 

So can I ask.....why Moscow?

 

As stated my Mrs is Russian.
Russian is a major city, it has a population of something around 15million people, and is growing steadily. As the region struggles the population is growing faster than demand can keep up. Property in Moscow is hugely expensive and continues to be more so.

We continue to look for opportunities outside of Australia for a number of reasons. Diversity being one. Russia fits our family profile well. The numbers and opportunity for growth stacked up. The largest risk we face with these purchases is the currency. I have no doubt that the value of them (at least in ruble terms) will be possitive.
In addition we were able to use leverage to our advantage.

Blacky

 

Thanks Blacky.

I've often wondered about investing overseas - I had a chance with Perp a number of years ago to buy US but was hampered here.

Always wanted to get back out there.

 

Yeah, we are looking at continuing to expand our 'offshore' portfolio. Looking at a couple of countries (US included) which are showing signs of action.

As mentioned elsewhere Austalia's biggest limitation is entry cost. Combined with low cash returns. The tax system presents advantages to residents - but non-residents miss out on that benifit. It makes other countries more attractive - esspecially if you can still use some leverage.
Added into that mix is the fact that I have a naturnal currency hedge by earning USD/GBP so one of the larger risks faced by others - is moderate for me.

Blacky

 

Australias biggest problems are :
- Transaction costs (Duty being biggest)
These limit short term transactions. (ie $25K duty, $4k legals + $10K REA fees) and require medium to long term cap gains to offset. The tax system favours this in half the time due to CGT discount.

Foreign property biggest obstacles are :
- Exchange rates (may also be a benefit). But always a risk.
- Possible loss of CGT concessions (ie US tax rate prevails over AUS)
- Inability to access foreign finance or enhanced risk if borrowing is AUD denominated
- Issues with foreign income v's AU income (withholding taxes in UK, USA etc).
- Foreign income losses not treated same as AU source losses
- Issues with taxation of positive income in country of source
- Duplication of tax risks. Laws can change - In both countries.

Not sure I agree on a natural hedge. That income is all taxed in AUD so hedging doesn't technically occur. Cashflow hedge perhaps but asset and liability remain exposed.

 

I was going to ask the same thing.
Braver folks than me.

 

Good points Paul.
Everyone has different perception of risk. For me one signficiant risk I face is my level of debt. Australian property values result in large exposures - even with low LVR's the $$$ figure of debt is significant.
Other countries have lower entry levels - and therefore it is possible to purchase with lower $$ figures of debt. Additionally other countries have lower entry costs (in some cases).

However, international purchases expose us to different risks.

I am not an Australian resident for tax purposes - so foreign income is not taxed in Australia. I understand that this is not the case for everyone.
As a non-resident I have no CGT concessions.
If you earn the same currency as what you borrow in, you have a natural hedge - as your repayments arent subject to currency movements. However as you mention, that is subeject to you borrowing and paying for property in the same currency. Its somewhat complicated.

International tax is a whole other kettle of fish. Im still not fully versed with it as yet.

Blacky

 

Agree, that's what stops me from buying much more here aside from the huge entry costs, the tax benefits don't make enough difference to me.

 

As an aside we pulled out of the second appartment puchase at the last minute.
We have used the cash to repay the loan in full. Essentially we now own the appartment for a $120k purchase price.

We will divert the other cash we hold into a different investment (yet to be determined).

Reason being is Im not comfortable with the level of exposure to the ruble - as there is no surety where it will be in the long term.

Only hidstire will tell us if it was the right choice or not.

Blacky