PL75

PROPERTY LETTER 5th August 2008

Dear All,

Market update:
The next year is going to be tough while we ride out the downside of an economic cycle which follows six years of low interest rates and rising property and asset prices. Most predictions are for a return to stability in 2009 and a return to economic growth in 2010.

France is less exposed than the USA and Britain because it was never as involved in the crazy lending spree that the USA and Britain experienced, and of all regions the French Riviera, and especially Cannes is the least exposed because of its “luxury” status. Neither buyers nor sellers on the Riviera are too stretched, nor buying their first home, nor hoping for (or labouring to pay back) a 100% mortgage. As usual, it is the less well heeled and the most exposed that are worst hit by the downside of any economic cycle.

But how is OUR market actually doing?

Buyers are expecting (or wishing) prices to drop so some of them wait for better days, and the market has certainly slowed as a result. It is a time of indecision.

Sellers in this wealthy part of the world have seen it all before and can generally afford to wait too. The result is that in an area where property is in such demand that there is seldom much on offer, now there is even less!

For anyone in a position to, now is the time to “cherry pick”. Some sellers are in need of selling, and a few bargains are cropping up. In my last Property Letter I highlighted a few of them, and will do so again today. A few investors have done very well with their purchases in the last few months and more with the means and the foresight will do well in the coming months because as soon as confidence returns the Riviera will be amongst the first to lift again. Few would argue that.

It is an interesting fact that some people who recently invested have expressed their relief that they “bought when they did”, because had they not done so their funds would inevitably have been tied up in other assets, and “not doing very well”. We have also had would-be sellers withdraw their properties from sale for the reason that they would prefer to ride out the current downturn owning property, rather than selling it.

The press have a lot to answer for:
I have quoted from “The Economist” magazine in these letters before – and I will do so again today. (So I’m not having a go at the press in general, but I do get fed up with some alarmist headlines!)

We are “herd animals” and it is amazing how we talk ourselves into crises, making them a lot worse than they should be:

From The Economist – July 26th – August 1st 2008.
“….Some blame the media for overhyping gloomy news. Phil Gramm a former senator from Texas and adviser to Mr McCain’s campaign, told the Washington Times that: “we have…become a nation of whiners. You just hear this constant whining, complaining about a loss of competitiveness, America in decline…Thank God the economy is not as bad as you read in the papers every day.”

Most Americans think their country is in a recession. But, buoyed by exports, output has yet to shrink for a single quarter. Mr Gramm suggested that his compatriots are suffering a “mental recession” rather than a real one….”

The article does not miss the important point that:

“….Consumers are facing a nasty squeeze, hit simultaneously by soaring costs for petrol, food and health care, tumbling house and share prices, tighter credit and flagging wages….have sent the overall inflation rate to 5% - higher than it was in 1992 when angry voters threw out George Bush senior.”

But the article concludes with the reality check that:

“Young voters have no memory of a serious recession, since the last one was in the early 1990’s. Some do not even realise that cyclical downturns are normal….”

Sarkozy scorecard:
With a new and glamorous wife who took the French and the world by storm (and attracted some bad publicity while she was at it) the new President’s popularity plummeted. However, the reform promised a year and a quarter ago in his election campaign is starting to slip almost unnoticed into law! Most surprising of all is that he seems to be managing it so far without the normal mass protests in the streets.

He had huge majorities in both the presidential and parliamentary elections - a mandate to deliver, and deliver he must or he will lose all credibility.

The promised reforms are mainly aimed at addressing France’s restrictive labour laws, thus combating unemployment, and streamlining the overweight and costly civil service. If he succeeds, and the signs are that he will, he is expected to jolt France into a welcome economic revival.

From The Economist again.
“He has time on his side. As part of the constitutional changes he got through parliament this week presidents are now limited to two terms. That in theory gives him until 2017. In many ways France, Europe’s second-biggest economy, will be decisive for the future of reform across the entire Euro area. Liberalisation in Germany is blocked by coalition politics; for different reasons, the leaders of Spain and Italy are disinclined to pursue it. But if France can successfully set the example, everybody else will be forced to sit up and take note.”

The Euro is strong (too strong perhaps) and France is resurgent in Europe and the world and the French people are expectant of positive change. It’s a good feeling to be there at the moment and although many would prefer that change could happen more quickly, there is little doubt that it is happening, and perhaps at a pace that is manageable.

Everyone remembers previous efforts at change that ended with an embarrassing government climb down after widespread and sometimes violent nationwide protests and strikes, but the unions are gravely weakened and the mandate given to Sarkozy to “fix France” was by European standards, a landslide.

An Investment Scenario:
(What it might look like on paper whether buying for yourself or as an income generating investment.)

A hypothetical two bedroom apartment in Cannes:
To view please open PDF link (52KB) 08-08-06 Investment Scenario - 2 bed.pdf

This is simplified, but not far from reality for an apartment in this “average” category.

Capital appreciation has averaged about 16% per annum in Cannes and most of the Riviera for the last 6 years, but has averaged about 10% per annum over the last 60 years.

Assuming only a 10% capital gain, the net return of 51 000€ on the investment of 317 500€ is 15.81% on a 50% mortgage.

Put differently, the investor in this example has seen a real return on his 317 500€ investment of 15.81% over the first year and although he has been cash negative, his wealth has grown by around 51 000€.

That’s all for today.

With kind regards,
Guy.