Many Israeli real estate developers are expanding their activity overseas, entering construction and development projects in Europe, the US and other regions of the world. Alongside the potential inherent in these investments, it is important to be aware of the risks involved, and especially currency risks. Fluctuations in exchange rates can significantly affect the project's cash flow and profitability flow, and cause large financial losses.
A study by the international consulting firm Deloitte found that 70% of international developers do not manage their currency risks effectively.
When an Israeli developer builds abroad, he is exposed to currency risks both at the land purchase stage and at the construction stage. For example, if you intend to buy land for one million euros, and the euro rate rises after signing the preliminary agreement and before signing the final purchase agreement, you will have to pay more shekels for the same land. Similarly, if you pay a local contractor in dollars, and a sharp drop in the dollar rate occurs, the construction costs in shekels will increase.
Fluctuations in exchange rates directly affect the project's cash flow. A rise in the foreign currency rate will increase expenses in shekels, and a drop in the foreign currency rate will reduce income in shekels. This could lead to a cash shortage, difficulty meeting financial obligations, and even damage to the developer's reputation.
Profitability flow is also affected by fluctuations in exchange rates. A rise in construction costs due to currency changes will reduce profitability, and a decline in income due to currency changes will also harm profitability. In extreme cases, the project could become unprofitable and even end in a loss.
Managing currency risks is critical to the success of construction projects abroad. By taking proactive steps, developers can protect themselves against potential losses and maintain healthy cash flow and profitability flow. One important preliminary note - it is important to consult professionals in the foreign exchange field and to obtain appropriate legal advice before making decisions regarding the management of currency risks.
So what do you do? To reduce the risks, developers can take several steps:
- Hedging: Using financial instruments such as futures contracts and options in order to lock in the future exchange rate, so that you know in advance how much you will pay or receive in shekels, regardless of market fluctuations.
- Diversification: “Don't put all your eggs in one basket” - a well-known saying that is important to apply to international real estate investments as well. Spreading investments across several countries and currencies reduces risk. If one currency weakens, another currency may strengthen and balance out the losses.
- Pricing: Taking currency risks into account when pricing the project (adding a safety margin to the sale price that will offset potential losses due to changes in exchange rates).
- Consulting: Don't try to navigate alone in the stormy waters of the currency market. Consult professionals who deal with currency risk management. They will be able to analyze your needs, recommend the strategy that suits you and advise you on the suitable financial instruments.
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית