PL 80

PROPERTY LETTER 10th February 2009.

Dear All,

We wish you health, happiness and prosperity in the year ahead.
Vicky and I are happily back in Cannes after our Christmas break in Cape Town.

At the bottom of this letter there are descriptions and photos of the most interesting properties we have seen since our return – I urge you to have a really good look at them. As always, far more information is available on request.

SPEEDING UP IN THE SLOWDOWN.
(From a study published by Google)

“Top companies speed up during slowdowns. History tells us that slowdowns are when winners get ahead. The performance gap between the most successful companies and their competitors becomes greater than during a growth period. The winners continue investing in growth and focus on profitable products and customers while carefully managing costs.”

And Warren Buffet famously said “Be fearful when others are greedy and greedy when others are fearful”. He also said “I buy when the lemmings are headed the other way.”

Interviewed on Sky News this week Theo Paphitis the self-made multi millionaire entrepreneur of “Dragon’s Den” fame said in answer to a question: “You turn on the telly or open a newspaper and it’s all doom and gloom. Let me tell you this is the most exciting time. The lessons we’ll learn will set us in good stead for many years to come.”

JOURNALISTS – LOVE THEM / HATE THEM.

People are nervous, and what we have seen in the world economy since last October has been enough to make anyone tremble. And aren’t the press having a field day as they frenzy-feed on all the bad news? Confidence fails in the face of the media barrage, and a bad situation becomes so much worse.

We need journalists for accurate and honest analysis and to keep us informed. And we need brave and clever journalists most of all, but here is one small example of the kind of journalism that makes me very cross:

A week or two ago I watched Gordon Brown say “I am angry” at the Royal Bank of Scotland on hearing that they had posted losses of about £8 billion, the biggest corporate loss in British history, largely as a result of irresponsible investment in the U.S. sub-prime market.

A few hours later I watched Jeff Randall on Sky TV’s “Jeff Randall Live” say “The Prime Minister says he is furious with RBS…”

HE DID NOT SAY THAT! THAT WAS FALSE REPORTING - QUITE UNTRUE!

According to the Oxford Dictionary:
Anger is “A strong feeling of annoyance, displeasure, or hostility.”
Fury is “Extreme anger. Extreme strength or violence in an action or a natural phenomenon.”

I think Jeff Randall was irresponsible. Why was it necessary to distort the truth?
I feel “anger” at his misrepresentation, small as it might seem to be in the big scheme of things.

ANOTHER VIEW.

A close friend and fellow investor in Cannes sent me these quotes from John Hodson, a veteran money manager who has witnessed many bear and bull markets in his time. He writes:

On “boom and bust” -
“However painful it feels, the economic downturn is nothing new and is not as bad as being portrayed by the media. What we are going through is a normal cycle; in other words an inevitable downturn after a long period of growth with the situation exacerbated by the banking crisis. Despite media hyperbole, those businesses going under are weak with a poor business model and it is natural they should fail.

The cycle of ‘boom and bust’ has not been broken and is still the norm, but what is different this time is that we have seen the first ever synchronised global downturn, with all the BRIC economies also participating. So we are currently witnessing a downturn in the economic cycle coinciding with huge deleveraging by investors (hedge funds come to mind) which although painful, will ultimately allow recovery to happen…”

On banks -
“True, the banks will have larger losses this year but the ‘write-down’ cycle is complete as the bulk of problems are known about and the loan losses down to recession are also pretty well known and quantifiable. The difference is that these losses don’t happen in one day as a headline hit and banks have time to prepare for recession-based losses, taking the hit over a period of time – in late 2009/10 – and these won’t threaten their existence.”

THE FRENCH PROPERTY MARKET.

It is generally accepted as fact that France is less affected by the “credit crunch” and therefore the downturn, especially in property, than most other developed economies. This has come about partly because of “the French way of doing things”. Foremost amongst these is the fact that the French do not adhere to a culture of borrowing. The table below is a stark illustration of this:

HOUSEHOLD DEBT AS A PERCENTAGE OF G.D.P. IN 2007.
(Figures obtained from CB Richard Ellis Market Review – January 2009)

ITALY                 --------- 29.7%
FRANCE               ------------------ 47.5%
THE EURO-ZONE   --------------------- 54.1%
GERMANY             ------------------------ 58.8%
IRELAND              ----------------------------------- 82%
SPAIN                  ------------------------------------ 83.6%
THE USA               ------------------------------------------ 98.2%
UNITED KINGDOM  -------------------------------------------- 103.5%

CB Richard Ellis further state that all analyses converge to position France as the “core” of the market in Europe for medium and long term investors in property. There are many therefore who will make their decisions to buy in 2009, the majority being interested in existing properties in Paris and the principal cities in Provence and the Cote d’Azur, from the perspective of resale in the medium term. Long term investors with the ability to self-finance are also anticipating that the market will stabilise in 2009.

Situated at the heart of Europe, these are the principal factors favouring the residential property market in France:

• Only 57% of French householders own their homes, the lowest in Europe.
• Credit is granted in France on the basis of the borrower’s capacity to repay, unlike some other countries where credit was granted based on the value of the property, or projected future rental incomes.
• Household debt being very low (see chart above) implies that households are not living beyond their means and that they are financially more stable than in other countries in Europe.
• The granting of fixed rate mortgages was the norm in France (98% in 2008) whereas many other European countries tended to favour variable rates. This market has suffered heavily as a result of the sub-prime crisis, the reverse of the French market.
• In France there is an unsatisfied need for accommodation.
• Positive demographics – according to the estimates of Eurostat, the population of France will increase by 7% between 2010 and 2025 (as opposed to 0.6% for Germany). The population under 15 years of age in France is the highest in Europe at 18.6% of the total, 2.8% above the European average. The birth rate of 2 children per woman is the highest of all the 27 European nations.

A GOOD REAR VIEW MIRROR.

There is nothing quite like a good rear view mirror, and I have had a few people say to me recently that they wished they had bought property in Cannes last year or the year before when they considered it but decided (often on the advice of their advisors) to wait a while. Markets have since crashed, their investments have lost value, and for those in sterling or the South African rand, so has the currency. I have had other investors say to me “Phew, thank God we did it” because their investment is intact, and property prices have remained fairly firm although sales are down.

Confidence has been hurt in recent months, and that is hard to restore. People have been beaten down by fear, negativity, and media bombardment, but now is not the time to sit out, dragged down by negativity – it is the time to fight that urge, particularly whilst some good properties are becoming cheaper or at least stagnating. Supply will soon be lower than demand and prices will start to rise again.

Quality property in France has an excellent track record of capital growth and the rental market remains strong (in the medium and long term), especially here on the Riviera. There is no doubt that this year will be a challenge, but there are and will be opportunities too. Shrewd investors are beginning to stir and opportunists are stirring too. It is quite likely that world economies have not bottomed out yet, the million dollar question being “when will they?”

If we wait for that perfect moment it is almost certain that by the time we recognise it the moment will have passed, and most investors would agree that it is better to buy a bit early than to invest too late.

Obtaining finance is still relatively easy for those who wish it. Lending criteria are a little stricter than before, but if one’s income is adequate and debt service ratio reasonable the interest rate for a fixed rate mortgage today is about 4.6%. It may even be a little less. The variable rate mortgage is exactly the same rate so as things stand today there is no advantage to going for a variable.

Local indicators are that there are more enquiries coming through in the New Year than in the three (dismal) months from October to December 2008. There are signs that things are picking up both in terms of local sales (to the French) and foreign enquiries.

In the rental market there has been a cautious re-awakening. During the last three months of 2008 as you can imagine it was very quiet. Nobody was booking and nobody wanted to put a deposit down and there were cancellations. Lehman Brothers for example had a block booking for MIPIM and obviously they aren’t coming any more!
 
There has been an increase in enquiries and bookings through Lao’s offices at Azur-Online, bringing January into line with last January. This is entirely thanks to the fact that all the staff are working very hard indeed to get bookings, discounting fairly heavily in the process, and that they have increased their marketing spend considerably. That is in the nature of things at the moment, but it is nonetheless fairly encouraging because the fact that there are bookings bodes well for a reasonable attendance at the major upcoming festivals and conferences. They have little illusion that 2009 will be tough but they are managing to keep things on track despite that. They are the strongest and most visible players in the rental market.
 
Please have a look at the rentals websites if you haven’t seen them before.
www.aur-accom.com/rentals

I LOVE AN OPTIMIST.
(Please take the time to read this – it is a breath of fresh air)

Alan Knott Craig is MD of iBurst in South Africa and the following is part of an end of year message to colleagues – I am sure he won’t mind me passing on his sentiments to you:

Hi guys,

Why am I writing this email? Because I'm getting the impression there are some depressed people walking around. So let's recap:
 
At the beginning of the year people were panicking about the oil price, inflation, electricity and economic recession. Of those big 4 concerns, 3 have taken care of themselves.

1. Oil is now $40 a barrel, almost one Quarter of the price of 4 months ago
2. Inflation is not such a big deal because oil is cheap nowadays so food & all other costs are falling
3. And .. we haven't had any crazy power outages since February (the Eskom saga is a complete mystery to me - The NEWSPAPERS said it would last 4 years??)
4. What about the Recession? Well, as it turns out, that was something that deserved panic. Especially if your name is Dick and you run a New York investment bank... Fortunately we don't have any Dick's at iBurst.

Sunny SA is certainly not immune to the global economic crisis. Our companies are suffering too, which means fewer bonuses and more retrenchments (always a winning recipe for unhappiness). How long will it last? Who knows, but brace yourselves for a tough 2009.  The good news is that after every tough time comes good times, so at least we all have something to look forward to!
 
 What is the silver lining for SA? Our interest rates are still high, but will decrease soon to ease the burden on your back pocket. The UK and USA do not have that luxury, their interest rates are already too low to cut further and it hasn't helped them at all yet!

What else? "Mad Bob" can't last forever. When he heads off into the sunset there will be an absolute bonanza of investment and aid flooding into Zimbabwe, and a large chunk of that windfall will be via sunny SA... oh happy days. Who said there were no plusses to having a failed state as a neighbour?
 
What else? Anyone noticed the cranes everywhere you look? Seen the Gautrain progress?  I went down to Cape Town two weeks ago, and virtually the entire highway is under construction. Durban has a new Stadium; a bigger harbour AND a new Airport all finishing in the next 18 months. The unintended consequence of the government procrastination on infrastructure investment over the past 10 years is that now that it's finally underway - just in time to prop up our economy! Gotta love those bureaucrats.
 
What else? The Soccer World Cup is coming. If we get it right we'll be the hottest spot on the planet - and we'll have a real shout for hosting the Olympics in about 2020.
 
But don't crack open the champagne just yet; we still have our fair share of challenges. Your average Yank may be swapping his house for a trailer, but at least he's not worried about being shot in the head on the way to his next job interview. If any of you have a relative or friend in the government, please pass on this message, "Crime is out of control and most of our schools and hospitals are in disarray." Don't for a second fool yourself that we can ignore these structural problems and live the rest of our lives in blissful ignorance. We must constantly remind the politicians to do their jobs, but we cannot absolve ourselves of our responsibility to make individual contributions.
 
It is our business to make this land a success. Report crime, pick up litter, give to the needy, create jobs, look after the children, practice safe sex, and drink filter coffee. We've all got a responsibility to make the magic happen; otherwise you'll just end up lying in bed in 50 years time, looking back and saying "What if?"
 
The time of opportunity is upon us, now it's up to us to seize the day. I've said it before, I'll say it again:
Life is not about waiting for storms to pass, it's about learning to dance in the rain.
Looking forward to dancing in 2009!

Well said Alan!
If I were younger I’d send my CV to iBurst. I would love to dance with your company in 2009 and beyond because iBurst must be a great company to work for.

With kind regards,

Guy.