PL74

PROPERTY LETTER 11th July 2008

Dear All,

We’ve had a very good couple of months in Cannes.
Some have invested and none of them will regret it. Others have visited us and had a good look around, but decided to “wait and watch” – with the current environment and talk of recession it isn’t surprising that people are hesitant, but my hope is that they won’t hesitate for too long because at some point the bounce-back will begin and those that “got in” will be well pleased and rewarded. (I’m not even sure that on the Riviera we are going to feel the full force of the downturn, although there are some good offers on the market at the moment – detailed below.)

Back to the visits to Cannes, and on a personal note: We have had an amazing spring of visits from all sorts of people from very old friends, to people we had never met before but now class as our friends. Vicky and I have so enjoyed both catching up with old friends and making new ones, and as we have commented to each other “we have more visitors here than we ever did on our beautiful farm in Zimbabwe”!
 
A Little Politics – Please Forgive me?
Although I was involved in politics and agricultural politics in Zimbabwe before we left there in 2001, I have made it a rule not to talk politics in my Property Letters – but it’s hard not to make at least a mention of it with the situation as bad as it is there today. The people are reaching the end of their tether, survival is a grind, and for many every day is an ordeal fraught with very real dangers. The crackdown on the opposition before the sham election in June has, if anything, intensified since it was held. Certainly the death toll mounts, homelessness grows, and inflation and unemployment have reached unthinkable proportions. The quote below was received in an open letter on 7th July from a brave opposition Member of Parliament:

“…The second point is that an urgent humanitarian crisis is developing in Zimbabwe so serious that if it is not addressed in a matter of days or weeks, will make life simply impossible for every Zimbabwean not hooked up to the ruling party gravy train. I spoke to the Headmaster of a school today and his salary - paid last week, bought 4 bananas. Inflation at more than 2 million percent is simply wiping out the accumulated capital assets and companies in a matter of weeks. If they do not have access to hard currency, these individuals and companies simply will not survive.

If this is not addressed and soon, the consequences will be catastrophic.
South Africa is already struggling to cope with millions of economic and political refugees. Squatter camps and high-density townships are packed with people - all living on the margins of society, many by crime. They simply cannot absorb a fresh wave of humanity from beleaguered Zimbabwe but they need to know it is on its way.”

You might be excused for thinking he’s exaggerating but he is not. Our family have a house in the capital city Harare, and here is our rental agent’s summary of July for your interest – madness indeed when you consider that only two years ago the government knocked three zeros off the currency to make it more manageable – so one should add another “000” to all of the numbers below.

“July rental US$160 multiplied by the interbank rate on the 25th June of Z$9,500,000,000 equals Z$1,520,000,000,000

Rental                       1,520,000,000,000
Less 15% commission    228,000,000,000
Less Levy                     35,000,000,000
 
Balance to your A/C     1,257,000,000,000
 
One trillion two hundred and fifty seven billion dollars.
 
The zero's take a bit of getting used to, also for your information we are only allowed to sign cheques to the value of maximum Z$900,000,000,000 so will do two cheques, one each day over two days as we also are not allowed to present two cheques from the same company to the same account in one day. All my banking has now doubled up.”

I’m not going down the road of the “fear and violence” (this is supposed to be a Property Letter!) – but rest assured that it is unbearable and all of our voices need to be heard to help bring a resolution and some desperately needed peace to this beautiful country which was until recently a jewel in Africa, and deserves to be again. Please tell someone that you don’t approve of what has been allowed to happen there - like your M.P. perhaps when you next have the opportunity. The world has sat on its hands for far too long when you consider that the murder and destruction started in 2000, and it should have been stopped then.

Back to Property – Back to Cannes.
Cannes is renowned as the “Jewel” of the French Riviera. There is no doubt that it is the most glamorous destination, home to more than 150 international conferences a year, and famous for its luxury shopping, super-yachts, palace hotels and palm fringed boulevards lining sandy beaches. With all of that it is compact with a population of only 70,000, and everywhere is accessible on foot. It is less than 30km from Nice International Airport, the second busiest in France after Charles de Gaulle, and the TGV passes through it.

Property prices which we have seen more than double in the six years we have been here (officially +101% from 2000 to 2006) have slowed to 6% in 2007, although prestige properties are still increasing at a double digit rate.

Cannes is one of the most expensive property markets in the world, Knight Frank having ranked it 6th in the world in their wealth report 2007, with average prices of 4,500 € per m². Prices are also hugely differentiated however, with prestigious apartments on the Croisette selling for 15,000€ to 20,000€ per m² and properties in working class neighbourhoods selling for 3,000€ per m².

Why?
Most of our visitors very quickly realise what is special about Cannes, and it is difficult to put it in words. There is a little rhyme that dates back to Victorian times but is still so very true, and it goes like this “Menton is dowdy, Monaco is brass, Nice is rowdy, but Cannes is class.”  That neatly and accurately sums up the Riviera from east to west. It sums up the enduring popularity of Cannes, with its havens of tranquillity just minutes from the Croisette for those who seek quiet, fabulous and panoramic views from almost every suburb and street, safety almost guaranteed and cleanliness a hallmark of the town, from ultra-chic neighbourhoods to billionaire enclaves.

It offers privacy and is discreet by nature and by tradition – nobody stares in Cannes – the people are used to royalty and the stars and allow them their peace and their space (Film Festival on the Croisette is an exception of course because the paparazzi are there in force, but they are supposed to be there at that time!) And the weather….is sublime!

At the beginning of this letter I wrote: “I’m not even sure that on the Riviera we are going to feel the full force of the downturn” – I made that statement because the buyers of luxury property are less likely to be affected by market fluctuations than middle class families are, and most of the property market in Cannes is in the “luxury” category by virtue of its situation, and is driven by international demand. Only three regions of France fall into this category and they each significantly out perform the French market. They are: Paris, where prices are expected to continue to appreciate; the French Riviera; and the major ski resorts.

And finally, if you want to feel that you are in good company when you invest in property, “high net worth individuals” worldwide (those having more than US$ 1 million investable) have increased their allocation to property from 16% in 2004/05 to 24% in 2007/08 according to Merrill Lynch, and much of that is in choice locations, Cannes and the French Riviera being high amongst them.

Common Questions Answered - In Brief:
(Please note that I am neither a lawyer nor a tax expert. However I have done the best I can to consolidate accurately the most essential information. If there are points that need clarifying I am happy to get expert opinion in order to give you the answers you require.)

Loans and Lending:

• French lending banks willingly lend to non-French residents.
• Typically a fixed rate capital repayment mortgage of up to 25 years attracts a rate of 5.20% to 5.35% today.
• There are constantly new products on offer, and one of those very recently introduced is offered at of 5.50% and described as “fixed rate, adjustable at the bottom”. This means that if ECB rates increase, the rate and duration applicable to your loan remain constant, but if ECB rates decrease, the duration of your loan decreases proportionally.
• Another new product is a variable rate mortgage (typically at 5.35%), fixed for the first 6 or 8 or 10 years with a choice of capping it at +2% or +3% after the fixed period expires. The duration of the loan may adjust but not by more than 20%.
• Another is a variable rate loan fixed for 3 years and capped at +3%.
• For European residents “interest only” loans are available in various forms and combinations of rates. For non-European residents these are not available.

Work and Residence Rules in France:

• E.U. residents can work and live in France, and so can spouses of E.U. residents.
• Non-European nationals need a “carte commerçent” to work. This has to be applied for.
• Non-European nationals can buy or establish a company in France, and may be salaried, but they should have an E.U. resident as their company manager (“gerant”).
• A “carte de sejour” (residence / work permit) can be applied for at the regional “prefecture” (in our case in Nice) or at an Embassy in your country of origin, and typically there will be a delay of 6 to 12 months while police checks are commissioned through the Embassy in your home country.
• Once you have had a “carte de sejour” for five years you can apply for French citizenship.
• It is possible to apply for a family “carte de sejour”.
• In business there are rules applying to many professions – to be manager of a hairdresser, a bakery, or a real estate agency for example, you must have a qualification in that trade and obtain a French “carte” to allow you to manage. In sales no such qualification is required, therefore to be a restaurant owner, or a shop owner etc. no “carte” is needed.

Taxes and Inheritance Issues:

• For most of us the objective is to transmit what we have to our children whilst incurring the lowest possible taxes.
• We however want to achieve the above whilst not depriving ourselves of occupation of our property or decision making over our assets whilst we are still alive.
• Where property is concerned this is facilitated by the creation of a small company (an S.C.I.) wherein the “parents” own the usufruct, and the “company” owns the property.
• When a usufructee dies the value of his usufruct is not taxed, but the value of his shareholding in the company is. His share of the company can be as small as he likes (5% for example), and his usufruct can pass untaxed to the surviving spouse.
• There are huge savings to be made in taxes, and each family or investor group should create their company in France according to their own circumstances.
• The S.C.I. is very flexible and adaptable to all family and partnership situations, including warring families.
• To create an SCI is simple and typically costs about 2 500€ in total.
• Each child inheriting receives an abatement (allowance) of 150 000€, and is only taxed on any inheritance above that figure.
• Inheritance tax is 20% up to 527 000€ and then rises slowly to a maximum of 40% when the inheritance reaches 1.7m€
• In order for your spouse to receive your usufruct upon your death, it is necessary that you put in place a very simple “donation au dernier survivant” or “donation to last survivor”. It can be done simply at any notary in France, or at any French Embassy worldwide, and covers all French assets at the time of death. The assets do not need to be itemised, and the “donation” will be automatically registered at the central registry so that there is no risk of it being lost or overlooked. All you need to take to the Embassy or the notary is your birth certificates and your marriage certificate.
• There is no inheritance tax between spouses.
• You can not disinherit your children in France so when you die your assets will be divided equally between your spouse and your children, meaning that if you have one child the inheritance is split two ways; if there are two children, three ways; if there are three children, four ways etc. Your French assets will be distributed under French law as your South African or English will does not have any validity in France. EXCEPTION: In the case of an unmarried person without children French law will direct the inheritance towards 1) the parents, or 2) brothers and sisters, or 3) cousins. However if a will has been registered (all French wills being automatically centralised) the wishes expressed in the will are taken into account. If there is a partnership a “pacs” can be registered with the “donation to last survivor” through your notary or Embassy, and the same rules will apply as for spouses.
• The S.C.I. is important and very useful for all of the above reasons, particularly when the value of individual inheritances are likely to exceed the allowance of 150 000€ per child.
• Wealth tax kicks in at 770 000€ of “net” asset. You will be taxed 0.55% per annum on the amount above 770 000€. From assets of 1 240 000€ to 2 450 000€ it increases to 0.75%, and after 2 450 000€ it reaches 1%. (However, the 1% only applies to the amount in excess of 2 450 000€ – not the whole fortune!) There is talk of abolishing it soon.
• If you are investing in that bracket, it is worth considering borrowing against an investment offshore, and in that way you will not have an asset in France, but a debt. No wealth tax.
• Capital Gains Tax on sale of your asset has been adjusted recently, and the rates today are 16% on “net” gain (after all allowances and deductions) for E.U. residents, 27% for French residents, and 33% of non-E.U. residents. After five years there is an annual allowance of 10% resulting in 0% C.G.T. after 15 years.
• Company tax (in simple terms) is 15% on profits up to 38 120€, and 33.33% above that, for those contemplating going into business.

With kind regards,

Guy.