Movements in foreign exchange markets can have a significant impact - both for good or ill - on investment returns in foreign property, experts in the sector say.

For international buyers of luxury properties, one of the most important, if not the most significant issue to weigh up is what happens to foreign exchange rates. Market participants say an expected rise in currency volatility in coming months will make the impact of such moves more of a pressing issue for wealth managers and clients.

Swings in currency rates can dramatically increase or hurt the relative attractiveness of properties in selected markets, sometimes amplifying investment returns or biting into them. Analysis from Knight Frank, the global estate agency firm that tracks trends in the market, points to some eye-catching forex effects.

In Hong Kong, for example, prime property prices surged by 67.9 per cent in the five years to March 2014, but buyers from New Zealand and Australia would only pay 10.2 per cent and 25.6 per cent more than they did in 2009 because of the appreciation in their New Zealand and Australian dollars, respectively, over the same period. On the flipside, Japanese or Turkish property owners – where local currencies have slipped – might see the present confluence of prices and currency rates as an opportunity to get out of the market. For US dollar-based investors, the Hong Kong market is free from currency swing worries because the US currency is pegged to the Hong Kong dollar. (This is a reason why Hong Kong property prices are particularly sensitive to changes in US Federal Reserve interest rate policy.)

Changes in investment returns and debt financing costs due to forex is a major consideration for clients of wealth managers, particularly as many high net worth and ultra high net worth individuals will typically have properties, for example, in more than one jurisdiction. This issue has led some firms, such as London-based ECU Group, for example, to operate multi-currency products aimed at mitigating impacts of foreign exchange moves, or by profiting - hopefully - from changes in exchange rates that are favourable to the borrower, for example. (Such services, needless to say, carry risks.)

With different central banks taking different courses on rates - the US is tapering its quantitative easing programme, as is the UK, while the eurozone and Japan are, arguably, moving in the other direction - the chances of a spike in currency volatility are high, Neil Staines, head of trading an execution at the global macro team at ECU Group, told this publication. "If you have international portfolios and global exposures, then you need to be aware of this," he said. 

In simple terms, the sterling-based investor, for example, with a basket of foreign properties will benefit from a falling exchange rate as the returns, priced in the foreign currency, go up, and lose when the position is reversed. Sterling has recently risen against the dollar and certain other currencies (the sterling-dollar rate is now north of $1.705 and the Bank of England effective exchange rate index, with January 1990 as a base of 100, is 88.93, compared with just over 80 a year before. Knight Frank noted that because of the appreciation in the pound, there are “few non-sterling buyers for whom prices in central London have appreciated at a slower rate than for local buyers”.

And Asian buyers of UK properties are feeling the impact of sterling: “The currency advantage for Asian buyers looking to purchase in prime central London now has diminished compared to 2009 when the weakness of the pound gave them a significant advantage.”

“The good news for those Indonesian, Australian and Chinese buyers who bought in prime London a year ago is that their asset has appreciated rapidly, by 37.8 per cent, 32.5 per cent and 18 per cent respectively,” it said, adding: “But for a significant cohort of buyers looking to buy in 2014 the strengthening pound has made a London investment comparatively more expensive."