Before any international travel, evaluating the exchange rate is a common and straightforward consideration. Calculated based on the value of one country’s currency compared to another country’s, the exchange rate consideration becomes much more multifaceted and complex when looking at a real estate purchase. A general understanding of how a currency is appraised is necessary for any budding real estate venture. In this case, we’re considering the evergreen strengths of the United States dollar (USD) against the Colombian peso (COP) as well as the particular conditions that make Colombian real estate ventures particularly fertile right now.
How they print COP. Government monetary policy is at least partly to credit for a relatively stable COP to USD price.
Colombia has what is known as a “free-floating economy” meaning that the value of its money is directly related to how much people are buying. This simple rule of supply and demand makes the COP both interesting and important to track from a historical perspective, as its rate has generally been quite stable, except a rocky period in 2014 where the peso lost a fair amount of value to the dollar. At the time, economic uncertainty due to inflation and falling commodity prices drove this change.
One important thing for real estate investors to keep in mind is that any foreign investor who purchased prior to 2015 will have much of their land appreciation gains mitigated by the deteriorated peso value. I’ll use a hypothetical example here to try and demonstrate what I mean.
Say you bought a nice 3 or 4 bedroom apartment in El Poblado or Laureles for COP 300,000,000 in the summer of 2014. (That amount of money could have gotten you something really gorgeous in Laureles). Back then, $1 USD was worth around COP 1850, so if you were using USD to finance it, it would have cost you about $162,000. Undoubtedly, prices in both these expat friendly neighborhoods have soared in recent years, and your apartment could be worth 75% more than five years ago (this is a conservative estimate). Perhaps you could get COP 525,000,000 for it in today’s market, but given that USD is worth so much more locally now than five years ago, that COP 525,000,000 only translates to around $169,000 USD at April 2019 conversion rates. Thus your 75% gain in the local real estate market only translates to a 4% gain ($162K to $169K) in USD.
This example should make it clear how important currency considerations are when considering an international real estate purchase. It is also something to consider when drafting an offer – I have heard several testimonies of foreigners being hesitant to sell in today’s market unless the price is well above current market value because they don’t feel as if they are properly reaping the gains that their investment has made, because of the strengthening of the dollar.
While there was some fairly significant movement on the COP vs USD exchange rate in late 2014 and early 2015, it is worth noting that COP has maintained its strength since then. No one has a crystal ball to know definitively where rates will go in the future, but one place to look for clues is at a country’s politics.
The ability of the COP to withstand tolling economic pressure is first and foremost a testament to its political stability as Latin America’s oldest and most stable democracy. Despite decades of civil unrest and drug-related violence, Colombia has not seen the kind of dramatic currency fluctuations caused by political instability in the way of other Latin American countries such as Nicaragua, Venezuela and Argentina. Currency rate fluctuations represent a risk to investors, but those looking to buy property in Colombia can take comfort in the fact the exchange rate is relatively stable. Since I moved to Colombia nearly four years ago, COP has always stayed relatively close to 3000 to 1.
UPDATE – October 2019: As the dollar climbs above 3500 COP, the diminution of gains for expat buyers who bought years ago, which was illustrated in the example above, becomes even more pronounced. Although real estate prices have risen in Medellín, it is still an excellent time to move dollars or euros into Colombia and make an investment. Check out this article with various tips about how to fund a real estate purchase in Colombia.
Real estate success is inextricably connected with government stability, making the Colombian peace treaty with the armed militant group FARC in 2016 all the more commendable for its attempt to negotiate a greatly nuanced and still-recent historical context.
Medellín as a city is extremely conscious of its turbulent history, but its residents are also extremely proud to have seen the city emerge so triumphantly from the ordeal. As its international recognition grows, so does its appeal to expats. This upswing in demand for housing coincides directly with the unprecedented economic strength the city’s middle class wields, bolstering said upswing and laying a strong foundation for an emerging and diverse real estate market ideal for insulating with the USD.
Do you see the COP growing relatively stronger or weaker to the dollar over the next few years? Have you been burned by exchange rate fluctuations in the past? Tell us about it. Leave a comment below or contact us.