PL76

PROPERTY LETTER 18th September 2008

Dear All,

Vicky and I arrived back last week from a wet and windy Cape Town to Cannes with the “Festival International de la Plaisance” – The 31st Cannes International Boat and Yacht Show - in full swing. Billed as Europe’s foremost in-water showcase there are 650 of the worlds finest yachts and multihulls on exhibition, many of them over 30m, and many being unveiled for the first time ever. What a sight to get back to! Each of our ports and the Bay of Cannes is truly buzzing with activity, and the boats themselves resplendent in the lovely autumn warmth and sunshine. Ahh!

The reason for it all is of course that the “Show” is an exceptional business event bringing together boatbuilders, service providers, equipment manufacturers, interior designers, marinas and the press, plus visitors from around the planet.

There is no question – Cannes really does these events so well!

MARKET UPDATE:
A colleague was at a property seminar recently. It was attended by leaders of property related sectors such as insurance, leading developers and the French chamber of notaries.

One of the keynote addresses was given by the national President of the Chamber of Notaries and these are some of the points he had to stress:

• The volumes of sales of New-builds are down 30% on 2007.
• However there remains a shortage of accommodation and in some areas prices are still rising – notably in areas of Paris and the French Riviera by 6% and in Montpelier by 4%.
• Banks are stricter in their financing but keen to lend where deposits are reasonable – meaning 40% to 50%.
• No across-the-board drop in prices is being seen, and few discounts are being given.
• France is not caught up in a crisis born of a speculative property market.
• French people are the least indebted in Europe!
• The UK and Ireland are the most indebted.
• In the context of Europe France remains strong and confident, and although sales are taking longer, the Chamber of Notaries senses no crisis.

Those are positive and warming words for us and our investors from the people who are at the heart of the market.

Straight from the mouth of a banker friend – they are issuing mortgages as usual, but where a client might previously have been offered a 70% mortgage they are offering 65% or 60%. There is little demand at the bottom of the market however, whereas “the high end continues as normal”.

SOME PERSONAL OBSERVATIONS:
There is no feeling of a sense of panic here. I have had a series of meetings since my return and there is a feeling of bemusement at what is happening across the channel and in the U.S. and a feeling that “they borrowed to the hilt didn’t they” and “we didn’t”.

It’s true that French banks have been conservative lenders, and have always insisted on strict vetting of borrowers’ financial strength before lending. Furthermore “buy to let” is of no interest to the lenders. Our investors who have jumped through the hoops for French banks already will know that “future rental income” was not taken into account by the banks, sometimes to our annoyance. We thought them unreasonable, especially when they would only lend us 50%, or 60% on a good day!

The market in Cannes is a very mature market. It is not a “first time house buyers’” market. It is quite separate from the market for suburban housing or residential blocks in cities and towns across Europe and the UK which are certainly vulnerable. That is not to say that some sellers are not feeling sufficient pressure to present us with some attractive buys, and most of those we find are coming from UK and Irish owners who are in a spot of bother back home and looking to raise a bit of liquidity. On the whole however, the reaction we are witnessing is that there is not much on the market – owners are saying “this is not the time to sell, we don’t have to sell, so let’s wait until things improve because we are not interested in substantially dropping our asking price.” Of course there are a few exceptions, but very few “for sale” signs.

THE RENTAL MARKET:
I had lunch with Lao yesterday and he was interesting on this subject. People in business have to come to Cannes (and he had no big forward-bookings in the name of Lehman Brothers thankfully!) however he is finding that they are more price-sensitive than they were. He believes he can turn this situation to his advantage.

He will shortly roll out a marketing campaign aimed at his business clients everywhere in which he will portray hotel standard “serviced apartment” accommodation as a low cost alternative to hotel accommodation. There are many who balk now at hotel prices, and we, with our good stock of apartment accommodation are well placed to provide a viable alternative for their visits to Cannes – but he also has to price the apartments correctly. There has been a tendency which he abhors for some people to exploit business during peak periods (like MIPIM and the Film Festival). He believes that this has to STOP – he’s always hated that trend and perhaps the new and difficult environment will wipe some of the “sharks” out of the game. We hope so because they do our industry no favours.

LEASEBACK – A different way to invest:
Leaseback was initiated more than 30 years ago by the French government to help provide tourist accommodation to an ever expanding demand for holiday accommodation. It was a plan designed to help the French government cope with demand while offering attractive incentives to investors.

Facts the government have to deal with:

• 80 million people visited France last year – making it the most visited country on earth.
• France is the world’s 5th largest economy, and regarded as one of the most stable.
• Politically France is stable too, a leading light in the E.U. (Sarkozy is the current president), and one of the five permanent members of the United Nations Security Council.
• Transport services to and from France are highly developed (by air, sea and land) and internal communications are regarded as some of the best in the world.
• France is blessed with favourable weather and some of the most stunning scenery in the world.
• And as the world’s third largest destination for international direct investment….

So what is leaseback exactly?
Leaseback is what the name implies – It is a scheme created by the French government in which you invest in an apartment and lease it back through a reputable management company specific to that development for a period of (normally) 9 or 11 years. They take care of everything.

• You own the property freehold, but all administration and responsibility for rentals is taken care of by the management company for the duration of the lease.
• At the end of the lease you may withdraw or renew the lease on newly negotiated (improved) terms.
• Your yield is guaranteed for the duration of the lease and normally it is between 3 – 6%, and it is adjusted or indexed to the «cost of construction» index as published by the government.
• V.A.T. of 19.6% is waived on new buildings, giving you an instant equity windfall.
• Up to 80% repayment mortgages are available (lending banks like leaseback) and Capital Gains Tax at the end of a 15 year mortgage term reverts to zero.
• There are no restrictions on non-residents.
• For French tax purposes there are many allowances so that you will pay almost none – interest on your mortgage for example is deductible, depreciation on building and furniture is deductible, as are legal and accountancy fees and land taxes (fonciere).
• Furnishing, decoration and insurance are all included in your purchase price.
• Under certain schemes and if you wish to you are able to use your apartment for a certain period each year for free, either for certain fixed dates or by arrangement and at reduced rates.
• You may sell your apartment at any time, however your purchaser will be bound by the terms of your leaseback contract – he will take over your contract with the management company for the balance of the term remaining.

WOULD YOU CONSIDER GETTING INVOLVED?
We have been offered up to 20 one bedroom apartments in a top class development, working in conjunction with a trusted professional with a great deal of experience in “leaseback” specifically.

This is what it is:

• 23 apartments out of 144 in a “4 star” development.
• 40 kms from Paris.
• 20 minutes from Orly International Airport.
• Situated in 55 Ha dominated by a magnificent 14th century castle.
• The castle is operated as a top-flight hotel.
• 18 hole golf course.
• Spa, Jacuzzi and fitness centres.
• Focus on company events and teambuilding, events, weddings, seminars, golf.
• Gastronomic restaurant.
• All apartments are in double storey buildings, many of them overlooking the golf course.
• Apartments range from 35 to 42m², with terraces.
• Prices range from 130 000 to 180 000€.
• 3 Weeks free occupancy per year to the owner and his family.
• Delivery Q1, 2010.
• Reputable and recognised developer.
• Reputable and recognised management company.
• The term of this particular lease is 11 years.
• Guaranteed 5% return (On purchase price less furniture) for the duration of the lease.

Financial basics:
Let us use this real apartment as an example – less expensive alternatives do exist:

Price including VAT (19.6%) and furniture   172 061
Furniture                                                  11 353
Actual net investment                              143 954
Saving realised through VAT refund             29 197
Mortgage fees                                            2 302
Notary fees                                                5 162    

80% mortgage over 25 years at 5.85% (fixed rate).
Capital required 28 773 plus mortgage and notary fees.
Amount of loan 115 091.
5% Annual yield on actual net investment 6 729.
The monthly shortfall starts at just under 200€ per month, reducing slowly until in year 17 the monthly shortfall becomes a monthly surplus.

60% mortgage over 25 years at 5.85% (fixed rate).
Capital required 57 545 plus mortgage and notary fees.
Amount of loan 95 318.
5% Annual yield on actual net investment 6 729.
The monthly shortfall is less than 20€ per month for the first four years until in year 5 the monthly shortfall becomes a monthly surplus.

Some buyers would like to have a bigger apartment in the long term and are requesting to buy two adjoining units in order to be able to conjoin them in the future. This is possible.

Normally the lending bank will allow that repayments start after delivery of the apartment, and in the interim all that is payable is a life insurance premium of about 30€ per month and obviously some bridging charges.

Please let me know your intentions. For those interested far more detail, photos, plans, financials and brochures are available.

This new dimension to our “normal” offers something for those who have found the amount of deposit required to get into French property too daunting. This is a more affordable way of getting into the French property market. It is also infused with safeguards, benefits and government backed incentives which might be particularly attractive to some of us in unsettled economic times.

Whichever way you look at it, leaseback is a very good long term investment vehicle.

Thank you for reading and I hope that the information has been useful and interesting. I have highlighted (below) just a few of the most affordable apartments we have come across since our return. In a later Property Letter I will get back to the higher end of the market.

With kind regards,

Guy.