Effect of Currency Exchange Rates on Israeli Real Estate

Effect of Currency Exchange Rates on Israeli Real Estate

Effect of Currency Exchange Rates on Israeli Real Estate

In the not too distant past, real estate transactions in Israel were priced in dollars. The cost of an apartment in shekels was not known, and prices were denominated by the dollar. When it came to real estate, Israel was the 52nd U.S. state.

This reality, though, has changed in recent years. Towards 2008 due to the frequent changes in the dollar-shekel exchange rate, the Israeli real estate market reverted to pricing in shekels. The losers were mainly foreign residents who bought and sold properties in Israel. When real estate pricing was in dollars Israelis, were vulnerable to exchange rate fluctuations. With the switch to shekels, Americans buying property in Israel priced in shekels now find themselves vulnerable to the exchange rate. If after signing the agreement there is a sudden drop in the dollar exchange rate, the American buyer is required to pay more in dollars than what was required upon signing. This leads to an unanticipated, further expense, and extra cash is suddenly required to complete the transaction.

The problem is far from theoretical; there were, in fact,  many cases in which, as American buyers found themselves out of pocket for the above-mentioned, exchange-rate based fluctuations during the interim before payment was due.

How to Protect Yourself?

The most basic advice I can give non-Israeli buyers is to minimize exposure to currency fluctuations as much as possible. There are several ways in which this can be done:

  1. Buying Shekels equal to the amount needed for transaction completion. This is a relatively simple solution that in fact “eliminates” the risk of currency exchange rates, but is not always a feasible option. This solution requires the buyer to provide the full transaction amount upfront. The disadvantages of this solution are obvious. Not all of us are wealthy enough to provide the full amount in advance. Sometimes the source of funding relies on money that is not readily available such as savings that are not yet matured, gifts, or inheritances. Moreover, in this situation there is some degree of risk. If the dollar exchange rate rises, the dollar price decreases and the non-Israeli buyer is required to pay less in dollars.
  2. Acquisition of protections such as options on the shekel and hedging of the exchange rate. This solution is more “sophisticated” and not all real estate investors are familiar with it. In addition, this solution has considerable costs.

Another possible solution is to negotiate measures with the other side, that will protect you from currency fluctuation. The contract should adjust the transaction price to your local currency. In today’s real estate market this option certainly exists, with the consent of the other party. When it is not possible to change the currency of the transaction, you can  determine a price range that will protect you. For example the contract can state that if the dollar exchange rate drops by 5%, the transaction will have a maximum exchange rate. This helps avoid a situation in which you need to provide more dollars than you initially planned for.

This is also the case when you decide on which mortgage to take. Your mortgage should be in the same currency as your salary or any other major source of income. If you work abroad or earn your salary in dollars, do not take a mortgage in shekels to avoid a situation where even if you get a raise, you still you find yourself with a sudden decrease in funds due to a sudden rise in the shekel.

Protect Yourself from the Unexpected

In this article I have pointed out the possible problems that can arise from the dollar to shekel exchange rate and suggested some measures of protection that will ensure a balanced cash-flow on real estate transactions in Israel. As an Israeli law firm which works primarily with non-Israeli real estate investors, one of the first things I do is check whether the transaction is exposed to exchange rate fluctuations. I make sure the contract includes the necessary clauses that protect my clients financial interests.

Life is full of surprises, isn’t it? Please make sure that exchange rate is not one of them.

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