Sunday, July 8, 2012

Time is Money

One of the issues that prospective foreign purchasers have to contend with when they seek to purchase property in Jamaica, is currency exchange rates. This can be particularly perplexing for a buyer who is unaccustomed to dealing in an environment of unstable exchange rates.

To have an idea of the extent to which exchange rates have fluctuated over the years, just take a look at the Bank of Jamaica website which sets out historical rates from 1971 relative to the US dollar. In 1971 the US  dollar was worth 77 Jamaican cents! That deserves an exclamation. Yes there was a time when our dollar was worth more than the US greenback. That state of affairs continued until January 1978 and from then on continued to be distant memory. Indeed over the last forty years the Jamaican dollar has declined in value by over 11,000%.

It is no surprise therefore that the Jamaican vendor generally welcomes foreign buyers with open arms as they show a willingness to part with their US currency. Since the rate isn't fixed and moves daily, negotiating a rate for the transaction is a critical part of the deal and reference is often made to the above-mentioned BOJ selling rate to come to a final agreed figure.

It is important to state a rate of exchange for a number of reasons including:
  1. To establish certainty.
  2. To facilitate computation of ad valorem costs. Eg. Stamp Duty, Transfer Tax and Registration Fees.
  3. To hedge against devaluation.
Protection against devaluation is usually the driver or motivating factor behind a vendor's push for US or other strong currency priced transactions. Interestingly, in light of this the foreign purchaser can leverage his financial position as a negotiating strategy to get the best bang for his buck. Conversely and equally interestingly the vendor can capitalize on the anticipated devaluation too.

Timing

A number of factors can determine the length of time it takes to complete a sale. Two main factors are:

(i) whether the purchaser's financing is in place and

(ii) whether the title to the property is in order.

A sale can take anywhere from 30 days to 120 days to close. This completion period is usually expressed in the contract and can be crucial to determining price.

It is not unknown for a purchaser to avoid escalation costs when buying property in a new real estate development because he is willing and able to pay in US dollars up front and prepared to wait for the building to be completed. This may be an extreme example but it demonstrates the point that the quicker the purchaser can pay in hard foreign currency the better his chances of negotiating a favourable price.

A smart vendor who is familiar with the lay of the land can argue that he anticipates devaluation of the dollar by the stipulated completion date. Indeed a sale price of US$100,000 at US$1.00:J$86 is equivalent to J$8,600,000.00 but three months later the rate could move to US$1.00:J$87.50. In other words three months later it could cost J$8,750,000.00 to purchase US$100,000.00.

Let me insert the caveat that no assumption should be made that the Jamaican dollar only moves in a downward direction. A careful examination of the historical rates confirms this. Note the period from May - September 2010. A Vendor in May 2010 who assumed that the rate would have fallen and set  the price accordingly would have had his costs on the sale linked to the higher exchange rate and would have seen his purchasing power diminish .........for a short while. But since we know that time is money that short while could cost him dearly.