Snow in Cannes!

It hasn’t snowed like this in 30 years.

La Croisette.

 

The famous "red carpet" at the Palais des Festivals.

     

Winter Wonderland! The first time there has been “real” snow in Cannes for 30 years.

 11th February 2010

PL 86 

PROPERTY LETTER 17th February 2010.

Dear All,

Vicky and I wish you a Happy, Healthy and Prosperous New Year. 

(This was intended to go out in January, but my Dad passed away on 28th and I flew back to Cape Town for 10 days. For those of you who knew him – he had his 90th birthday in December, but the last few months were very hard for him. We will miss him sorely.)

Looking back:

A year ago even die-hard optimists must have felt some apprehension as to what 2009 would bring, and without wishing to be insensitive to anyone I think we all survived! Without doubt we go into 2010 feeling a lot stronger and more positive than we did twelve months ago, and for my part – I feel quite excited.

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Looking forward:

There will be a lot going on in Europe (and of course in South Africa) this year, and oodles of opportunity, so we will be involved in identifying some of that opportunity and sharing it with you – France is fabulous, and Cannes is way out in front.

A truism I have learned is that 80% of successful property investing is psychological, focussing on the why as opposed to the how (which is where many investors spend most of their time with less success). If you have decided why you want to make your move, then the how should not stop you because many others have done it before you, and there is plenty of help and advice to be had along the way – it is all too easy to fall into the “inertia trap”, and let opportunities go begging or dreams go unfulfilled.

For some years I have stayed in touch with Gill Fielding whom Vicky and I spent some useful time with when we first found ourselves “out” of Zimbabwe and the life we knew. Some of you may have seen her in the BBC series “The Secret Millionaire”. In her January edition of “Fielding Financial Focus” she talks about getting “Back to Capital”. I very much appreciate her positive and inspiring approach and to quote from her letter:

“Now I think we can all be agreed – in general terms anyway – that the property market has either hit the bottom or maybe even has started to go up again…. Professional investors know for certain that property prices will double every 8 years or so and even when we have dips in specific years those dips rarely impact the long term trend of property prices rising at an average of 10% per year whatever! Surprising that news still makes headlines really, but it does…. I am certain that there is an upward trend due so I want to get ready to take advantage of that.”

For South Africans:

If you believe that the rand is set to devalue, it makes sense to hold assets where they can maintain your wealth in foreign currency terms. Put differently, with the rand relatively strong, now would not be a bad time to send funds offshore for a property investment. You'll get more property for your money than you would have, say, a year ago, and with the recent doubling of foreign allowances there is a limited window of opportunity for South African investors to move money offshore – limited because the new measures are generally believed to be aimed at trying to weaken the rand, so those with a spare million or two might be well advised to act. (See also the short section below relating to offshore banking opportunities in Luxembourg under my sub-heading “For some.”)

Writing in “Realestateweb” recently, Offshore Property Addict said that “those with foresight to invest 20 years ago in an average property in a quality Perth suburb (Subiaco) would have spent about $176 000 (Australian dollars), the median house price in the late 1980s. In 2009, house prices in that suburb reached about $1,1m. The rand's depreciation would have massaged that return of more than 600% into a return of more than 2 000%”.

He added: "Lack of local knowledge and an insufficiently deep understanding of foreign property markets is what scare potential investors away. They should do some homework - it delivers excellent dividends!" 

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Yields and Dividends:

What one must remember is that although net yields (of 3% to 5%) seem quite modest in first world low interest environments, the investment in property is very safe and capital appreciation is guaranteed in good locations. 

When you put capital appreciation and rental income together, and add that to the safety of the investment compared to other investment classes, the “dividend” (or “benefit from an action or policy” according to the Oxford Dictionary Online) begins to look very attractive!

Also add 1) the fact that each month you chip away at the capital outstanding increasing your own share of the equity or ownership (assuming that you have borrowed), and 2) the well known allowances and advantages of property as a tax shelter, and the return on your investment (R.O.I.) looks better and better.

In Summary:

Net Profit R.O.I. is the amount of cash left over (or the shortfall) at the end of the year, expressed as a percentage of your own total investment in the project. It may be slightly positive or slightly negative depending on your level of borrowing and rental success. Borrowing over 50% is likely to leave you feeding your account from other sources. Under 50% and you’re likely to “wash your face”. 

Typically (a recent example showed a shortfall) (-1.09%)

Capital Appreciation R.O.I. is the appreciation in the value of your property expressed as a percentage of the total amount of money you invested in the project. It is important to understand that the more you borrow the bigger will be the Capital Appreciation R.O.I. because the appreciation on that part of the property owned by the bank accrues to you if you sell (not to the bank!). This is not meant to encourage excess borrowing – it’s just a fact. You still have to make your repayments.

Typically (Cap. App. Estimated 10% p.a.) 17.51%

(In this case borrowing 60%)

Equity Build-up R.O.I. is the portion of your repayments during the year which is applied to capital, therefore the amount “more” of the property you own at the end of the year than you did at the beginning, expressed as a percentage of your total initial investment.

Typically (Borrowing 60%)           4.38%

Tax Shelter R.O.I. will vary from case to case depending on how and where the individual normally pays his taxes, and how much advantage he is getting from being offshore and in property. Whatever his tax saving is can, and should because it is a REAL return on his investment, be expressed as a percentage of his investment.

Typically    10%

Total R.O.I. is the sum of these four figures. It is the net increase in your wealth measured against the total investment you have made. This applies whether you buy for your own use (and it happens without your actively taking the R.O.I. into consideration because your most important return is in pleasure and use) or whether you buy for pure investment and monitor your financial return closely. It is passive income – and whether you’re awake or asleep, playing golf, on holiday, or working on something completely different, it just carries on accruing, day and night.

In this example (wealth increased by)    30.80% in this year.

And don’t forget the SAFETY of the investment and the peace of mind.

The object of the paragraphs above was to demonstrate to those who are new to it that when investing in property there are more considerations and more “wealth builders” than rental income and resale value alone.

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Ten important questions you need to ask your agent when investing offshore.

(These questions are straight from an article in “Real Estate Investor” magazine.)

1. Who do you represent – me or the seller? Our aim is to do the best job possible and to provide value to the seller and the buyer by concluding a deal which is mutually beneficial. Having said that we spend 90% of our time communicating with buyers answering every possible question and understanding their needs, especially as the investment is an offshore investment, and in another language.
2. How familiar are you with the country and the area in which the property is situated? We have lived in Cannes for eight years and property is all we have done here, so our experience is first hand and detailed. Our professional advisers are all French – Advocate, Notary, Accountant, Bankers, and Agents. 
3. How do the properties you market compare with others in the area? We spend a great deal of time in the marketplace, visiting and comparing properties, and we only offer a very small selection of what we see. We look at position and condition, price and value in the current market, potential for adding value through improvements, and rental potential. Our relationships with investors are inevitably long term, and we search out the best investments for them.
4. What due diligence do you follow on the properties you sell? We give as balanced and informed a report as possible on potential investments, with the help of our professional and FNAIM (the industry regulatory body) registered agents.
5. Could you explain how the buying process works? We provide all the details you require, and I have a one-pager on our website for quick reference: http://www.azur-accom.com/process-explained 
6. How will you assist and support me throughout the process? We assist in every detail from identification through transfer and renovation to rentals if required. Please page down to the next sub-heading “What is it that we offer you exactly?” In it I have explained a little more fully the extent of our normal services.
7. Could I make contact with previous buyers? Testimonials are useful and you are very welcome to have a chat to previous or existing clients, and we will happily provide their contact details (after having asked their permission).
8. Do you own any property in the area yourself? We bought three studio apartments for rental in 2002 when we started, and have since turned over one of them (at a profit) and reinvested in another one bedroom unit and a three bedroom unit. Our four personal apartments appear along with yours on the rentals sites and we run them just as we do yours. 
9. Can I use my own independent solicitor and mortgage broker? Absolutely no problem at all. If you have your trusted professionals, use them by all means, and if you do not we have a very experienced and trusted team to whom we will very willingly introduce you.
10. What happens to my fees if things go wrong? There is a substantial amount of work that goes on behind the scenes to ensure that each investment completes successfully, and the agents need to know they are working with a serious buyer. However things don’t always go according to plan and very occasionally sales fall through, through no fault of the agent. In our situation however, the agency fee is paid by the seller after signing, and there is no recourse to charge the buyer except (possibly) through the courts, and I have never come across it yet.

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A Year ago I explained what we do in Cannes, and because memories are short and the mailing list includes many new names, I will repeat myself. My apologies to those who have heard it all before.

What is it that we (Vicky and I) offer you exactly?

• We spend all our time and a great deal of effort sourcing “the right” properties for investors. We will find the right property for you when you are ready, if you will allow us to. Many of you want a rental return to help offset your costs and mortgage – and that is our specialty. However if you want a second home, something just for you, then we will find that for you too
• Once you have decided on your property we will help you all the way through to transfer, including help with obtaining a mortgage from a French or Luxembourg bank. You don’t even have to come here if you don’t want to, and many have not.
• If the apartment needs renovation or furnishing we will put you in direct contact with people who can do it for you, with our oversight. They will work to your budget, your specifications and your tastes. All of this is possible using e-mail.
• Vicky will arrange for the opening of your French bank account if you don’t have one and administer every aspect of your property if you require her to. That includes banking, payment of local and government taxes, levies, electricity, water, insurance (including handling claims when they occur), and provide you with a  monthly statement of all income and expenditure which balances to your bank statement. She will also do your French year-end tax returns if you’d like her to, and anything else administrative that arises.
• We take care of all minor and major maintenance and upkeep of your property if you want us to.
• Our son Lao runs Everything Cannes http://www.everythingcannes.com/default.php and Azur-Online http://www.azur-online.com/default.php , the two most efficient websites marketing accommodation in Cannes. His organisation takes care of marketing and rentals and everything that goes with it - cleaning and servicing, collecting deposits from guests, and payments, airport transfers, meets and greets. They are a highly skilled, dedicated and efficient team with seven years of experience behind them.

Some properties are owned in the investors’ personal names, and some investors have formed small French companies, particularly where ownership is shared between family members, friends or acquaintances. This small company created specifically for the ownership of property is called an SCI (Société Civil Immobilier) and is simple and very cost effective to set up. We can put you in touch with the Advocate who has done many for us and who can take care of it for you if required.

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A common immediate reaction of many people outside France is that although they know they would like to, and for many it’s a dream, owning property in France is seen as a dream that can’t very easily come true…

• I can’t speak French.
• I don’t have an E.U. passport.
• How can I get a loan when I don’t own anything in France?
• But I can’t look after it from miles away.
• I don’t believe in management at arm’s length – I believe in “hands on”. 
• What will my tax status be?
• And so on…

We have heard it all time and again, and many people have missed opportunities because of their fear of the unknown (or the inertia trap mentioned above), but the truth, in the words of a well-known recently elected President is: “Yes you can!” And frankly, those who have are better off for it.

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For some:

This is important for some, especially with the Channel Islands becoming increasingly subject to changing laws, and for those with an eye on French wealth and inheritance taxes:

• One does not need to “cash in” ones US$ or sterling in order to borrow in Euros. There are alternatives to this, and alternatives to the C.I., and these alternatives may be worth investigating. (If you are interested I can put you in touch with a trusted friend and professional contact in Luxembourg for further discussion).

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Market update:

(Source - Knight Frank)

• The recovery in global house prices continues with values increasing in 68% of the countries reporting price changes for Q3 2009
• House prices, however, are still lower than 12 months ago in 57% of the locations
• Israel remains the top performer over a 12-month period with prices increasing 13.7% to the end of Q3 2009 
• On a quarterly basis, Singapore saw the biggest rise with prices up 15.2% during the third quarter of the year
• Dubai recorded the largest annual drop (-47%), but posted moderate positive growth in Q3

The French housing market overall contracted 8% in the 12 months to the end of the 3rd quarter of 2009, but in Q3 taken in isolation it increased by 1.9% indicating a turnaround in the second half of the year.

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Rentals update:

There is plenty happening, and Lao and his team are moving mountains to capture an ever greater share of the market. Perhaps in a Property Letter to come I will be able to provide more detail – right now it would be premature. Suffice to quote Lao: “the year to date has got off to a far better start, and all metrics are showing a good 15/20% increase on 2009.” 

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We have a wealth of experience now, and tried and trusted contacts in every field related to purchasing and owning property in France, and we are here to share our experience with you and to make your overall experience a happy and a profitable one.

With kind regards,

Guy.