Understanding Currency Risk: A Lesson from a Property Purchase in Pakistan

Understanding Currency Risk: A Lesson from a Property Purchase in Pakistan

Introduction: In this blog, I would like to share a story about one of my friends who made a property purchase in Pakistan. This tale holds an important lesson for everyone, regardless of their background in economics or finance. As an individual fortunate enough to have studied economics at a top university in London, I aim to explain the concept of currency risk and its impact on my friend's property investment.

The Property Purchase: During the prosperous times in Dubai, my friend decided to invest in a property in Pakistan. At that time, property prices in Pakistan were also on the higher side. Here are the details of the transaction:

Property Price: Pak Rs 25,000,000 Price in AED @ 16.5 AED 1,515,151 (property value in Dirhams)

Initially, it seemed like a good deal. However, during a recent conversation, my friend mentioned that the property value had increased. The current value he shared was:

Property Value: Pak Rs 29,000,000 Value in AED @25.8 AED 1,124,031

Analyzing the Currency Impact: On the surface, it appears that the property value has increased by Pak Rs 4,000,000. However, when we consider the value in Dirhams, we notice a reduction of AED 391,120. This significant decline in Dirhams clearly demonstrates the effect of currency devaluation on property value.

Understanding Currency Risk: It is crucial to comprehend that while property prices may appear to rise in local currency, they can experience a decline in real terms due to currency depreciation. Factors such as inflation and currency risk can have a negative impact on property values.

Evaluating Investments in Multiple Currencies: To gain a more accurate understanding of your investment, it is advisable to calculate your property value in various currencies. For example, you can assess your property's value in US dollars. By using dollars as a benchmark, you can compare the real value of your investment. While this method may not provide an absolute value, it brings you closer to the real value, considering the relatively lower inflation in the US compared to Pakistan. Determining the true value of your investment requires discounting it by the annual inflation rate.

The Importance of Awareness in High-Inflation Countries: If you reside in a country with high inflation, it is crucial to exercise caution. Although things may seem favorable on paper, a closer examination reveals that you could be losing in real terms over the long run. Understanding the effects of inflation and currency risk is essential for making informed investment decisions.

Conclusion: The story of my friend's property purchase in Pakistan sheds light on the concept of currency risk and its impact on property values. While property prices may appear to rise in local currency, currency depreciation can significantly erode the real value of your investment. It is imperative to evaluate investments in various currencies and consider the effects of inflation and currency risk. By understanding these factors, you can make more informed decisions and safeguard your investments in an ever-changing economic landscape.

Disclaimer: Please note that currency rates, property values, and inflation figures mentioned in this blog are subject to change. It is advisable to conduct thorough research and seek professional advice before making any investment decisions