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Add the Costa Rica Colon to the list of strong currencies: Colon, Euro, Pound, Loony!

This week Costa Rica's national currency appreciated almost 4% against the U.S. dollar, for the first time in over 20 years. One dollar now buys 496.6 colons. Three days ago it bought 516.8. From a price series provided by the Central Bank of Costa Rica, the dollar has appreciated between 4% and 13% annually over the last ten years, in a "creeping" devaluation orchestrated by the Costa Rican government. This has had the effect of negating local price inflation over that period for investors spending dollars.

No more. For all of 2007, the dollar is now unchanged against the colon.

What does this mean for real estate investors in this hot market? If this week's price movement is a trend (want to bet it's not?), then construction costs are going to go up by an amount equal to annual inflation in local prices, around 9% for 2007, plus (or minus) changes in the dollar/colon exchange rate.

To find out whether there is a trend, consider the following changes in the exchange rate: 2003, dollar up 10.5%; 2004, dollar up 9.5%; 2005, dollar up 8.3%; 2006, dollar up 4%; 2007, dollar unchanged; week ending November 23, dollar down 4%. Hmmm.

At our premier real estate condominium development along Costa Rica's booming northwest pacific coast, The Oaks Condominiums, we had the foresight (luck?) to buy our cedar wood, concrete and iron rebar in advance for the first two phases. Our luck did not extend to phase three. Prices will be going up soon.

Green Seal Realty

Does Currency Matter?

Two weeks ago I initiated our correspondence with some fearless economic forecasts. I know I said we’d check back every three months, but one part of the forecast is worth revisiting.

For our clients from Canada, prices in all our Costa Rica real estate developments have gone down by about 4% in the last two weeks. For our clients from the U.K. and the Euro zone, prices have gone down about 2% in the last two weeks.

What happened? Currency movements. Costa Rica real estate prices are measured in U.S. dollars, so as the U.S. dollar falls and the Canadian dollar, Pound and Euro rise, real estate investors from Canada, the U.K. and Europe benefit, even when prices in good developments in Costa Rica are still going up in U.S. dollars.

Let’s go back to January 2, 2007 and look at a real life example. On January 2, the lowest available price of a two bedroom/two bath luxury condominium in our premier ecological project, The Oaks Tamarindo, was U.S. $102,500. According to the Bank of Canada, the Canadian dollar at that date was worth 0.8584 U.S. dollars. So the price in Canadian dollars was $119,402.25.

On November 2, the lowest available price of a similar luxury condominium at The Oaks Tamarindo was U.S. $142,500. The value of the Canadian dollar at November 2 was 1.0702 U.S. dollars. So the price in Canadian dollars was $133,152.68.

At this premier ecological real estate project in the booming Guanacaste area of Costa Rica, U.S. dollar prices were up on the year 39%! But for Canadians, thanks to the booming Loonie, prices were up only 15%. Would a Canadian have been better off buying at the beginning of the year? Yes, by 15%.

For U.K. and European clients, currency movements show similar but less pronounced results with a 31% price rise in British Pounds and a 27% price rise in Euros.

Why does this matter now? Because the rainy season is about to end. We anticipate price rises again this high season as the best projects continue to have strong sales.

General price inflation in Costa Rica, measured in U.S. dollars, is running about 8% per year. Add to this an imbalance between supply and demand at prices under $300000 U.S., and you do begin to sense that this is a good time to consider investing in Costa Rica.

If your forecast is that the U.S. dollar will continue to slide, then the best way to invest is to put down a small deposit on future development, paying the bulk of the price later, in cheaper dollars and dearer Canadian dollars, Pounds or Euros. This means a pre-deposit at phase three at The Oaks, or a pre-deposit at Sea Breeze Mountain, or other structured investments that we can help you with.

If your forecast is that the U.S. dollar could reverse its downward course, then the best way to invest is to buy something close to completion, where you convert your investment into U.S. dollars now, such as a resale at phase one of The Oaks. And if you want to hedge your forecast, then the best way to invest is in a construction project where you convert about 40% of your investment into U.S. dollars now, and invest the balance over 6 to 9 months.

In all cases, invest in quality. And for us, quality includes sound environmental practices. Help Costa Rica stay green.