For our long-term subscribers, many of you know that I have touched upon the subject of the USD / COP exchange rate on numerous occasions.
Last year it became exceptionally important when the new leftist Colombian president Gustavo Petro was elected.
A number of our foreign friends and clients became concerned that the COP would weaken indefinitely, and sure enough, it rose from the 4400 range around election time to an all-time high of 5165 last November.
During those uncertain times, social media was a hive of speculation, with some predicting a rise to 6000 and others even forecasting a shocking 10,000. Some predicted Colombia would follow in Venezuela’s footsteps.
In several of my newsletters last year I had to remind our readers that Colombia is the oldest democracy in Latin America. President Petro would have to deal with a Congress to pass laws, a not-so leftist Supreme Court to uphold them, and a military that was much more conservative than its president.
The Dance of Currency: Recent Developments
In the past six months, the US and Colombian political landscapes have evolved. Interestingly, our clients from the United States have expressed more concern about President Biden than President Petro. Importantly, a number of sub-par Petro planned initiatives have had trouble gaining traction. The USD started weakening internationally. The COP started strengthening against the USD.
Today, as I write, the exchange rate just went below 4000 to 3999.
Over the last 12 months we have counseled a number of our new foreign buyers who were concerned about a spike in the USD to 6000 or higher. They thought that perhaps they should wait before purchasing.
Well fortunately for those who went ahead with their purchases, they already have a built-in gain of 10-20% just on the currency play alone (the gain they would make from converting their COP into USD) and not including the 12% property price appreciation.
As we move through this year, I’m sure we’ll continue advising our foreign buyers, particularly those from North America, who are wondering if they should wait for the USD to go back to 4500 or even 5000 before purchasing.
When I hear this, I will repeat what I have said many times over the past 16 years during my time in the real estate business here:
Currency markets are unpredictable and nobody knows where they are headed!
If you feel certain about the direction of the USD, why not take a chance on the highly leveraged currency futures market? If you are right, you can make millions and I sincerely wish you luck in that endeavor.
On the other hand, if you’re looking for a more reliable investment, consider the Medellin real estate market, which has seen consistent long-term gains since 2002 of 7-8% and double digit returns over the past two years.
A Strategy for Savvy Investors: The Benefits of Diversification
Now, onto a key point for investors: diversification.
No savvy investor puts all their eggs into one basket, and that includes currencies. For investors who have 100% of their assets in USD, perhaps they should consider diversifying into some other currency(s), like the COP.
However, if you truly believe that the USD will forever be the world’s central bank reserve currency, and that the US plans to reduce, not grow its $32 trillion debt, then maybe there is no need.
But for investors who have any doubts about the long-term veracity of the USD, then perhaps diversification is in order and they need to pick their currency and country to make an investment(s).
Personally, I am not too enamored with Europe because if the USD takes a dive, the EURO may closely follow the same path. I do not see the Middle East or Africa as the answer which leaves Latin America, Asia and Australia/New Zealand as primary candidates.
Colombia’s proximity, accessibility and relation with the US certainly puts it into a prime position for international investing.
Consider this thought, often shared among financially savvy expats: does the direction of the USD/COP exchange rate really matter?
Unless you’re planning to sell your investment quickly and repatriate your funds, the exchange rate should be of little concern.
Let’s explore three possible scenarios based on the current rate of 3999.
Forecasting the Unpredictable: Three Possible Scenarios
Scenario 1 – Let’s say the exchange rate hovers around 3900-4100 for the next five years. In this scenario, your property would likely appreciate at a rate of 7-8% per year (a figure based on our average from 2002-2021), and possibly even higher, considering we were up by over 10% in 2022 and look set for a similar increase in 2023.
Factor in average rental returns of 6-8%, and you’re looking at total returns of 13-16% each year – quite a sweet deal for owning a slice of paradise.
Scenario 2 – Now imagine that in five years, the exchange rate returns to its more typical range of around 3000. For those who convert their COP back into USD, they’ll see an additional 25% gain from the currency shift, bumping their average annual returns to around 18-21% without leveraging.
That’s a substantial return, especially considering you’ll be investing in a city renowned for its climate and popularity among digital nomads and remote workers.
Scenario 3 – What if the next five years take us back to an exchange rate of 5000? Now, you’d have a decision to make. If you repatriate your money to the US, your total annual return of 13-16% will be reduced by about 20%, averaging at 9-12%.
Not too shabby, but not as stunning as the scenarios above.
However, you might choose to keep your COP here in Medellin, living like a king or queen when visiting, while living here, or even making further local investments. As the USD strengthens against the COP, things become even more affordable in Medellin for those earning or holding USD.
At 4000, I can’t even spend my entire monthly social security check, and at 5000 it gets even better. For those on social security in the US struggling to make ends meet, or for those looking to indulge in fine dining and shopping without worry, Medellin becomes a prime target at these levels.
The Value Proposition: Medellin’s Real Estate Market
Keep these scenarios in mind as you contemplate the merits of investing in Medellin which is undervalued compared to other cosmopolitan cities.
In fact, it may be the most underpriced cosmopolitan city worldwide thanks to Pablo Escobar and the stigma he left on the country.
Besides being undervalued, 95% of properties in Medellin are purchased with cash. This lack of leverage safeguards the market against dramatic price swings like what occurred in 2007-2008 when real estate prices fell 20-40% in the United States.
Conversely, Medellin prices actually went up 3.4% during that same time period. Low leverage, low carrying costs, being undervalued, and being the most prized assets by Colombians, protects the market here from the crazy price swings that occur in many other countries.
Your Path to Paradise: Get Started with Primavera Realty
So, when considering both risk and value, Medellin real estate will be hard to beat.
Record sales over the past year underline this promise and continue to indicate a healthy market. Our team is here to assist you, having successfully closed more than 500 properties for our foreign buyers and investors since 2007.
Don’t let the exchange rate keep you from owning a piece of paradise! Contact your Primavera Realty real estate agent today.
If you do not have one, please reply back to me and I will send you an informative introductory package plus introduce you to one of our six experienced bi-lingual realtors.
Or you can simply explore our 400 sales listings and make an inquiry in case something catches your eye.