Property Letter July 16th 2004

Posted by admin in Property Letters | July 16th 2004

Dear All,

Although we have not met all of you, and my Property Letter mailing list grows, the majority of you still are family, and old and new friends, so I hope you will all forgive a little bit of personal news thrown in. Likewise I know that Lao has taken this opportunity to add some of his friends and contacts to our mailing list, so to you I hope you will find this infrequent letter informative and interesting. However, to all of you I stress as always that we do not want to be an annoyance, so if you don’t want to receive these please let us know or just “unsubscribe” at the bottom.

We have had a wonderful break in Cape Town (we are so lucky to live here) and in the game reserves of the North with our and my sister Suzanne’s families. We missed Lao and Katherine…but somebody has to work! We have had wonderful weather, and spectacular game and bird viewing, and I was able to reconnect with many of my ‘old friends’ in the tree world! I am preparing to return to Cannes on Monday, and excited at what lies ahead. There is a so much that is positive going on. Vicky will follow me a fortnight later, on 2nd August. Both our younger children started back at University this week, at the beginning of their second semester in their respective years, having passed all their mid year exams very well. So it’s time for us to get started again too.

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I had the most beautiful run the other morning, and that is when I do a lot of my thinking. Property seemed to me to be a bit like rugby! The game revolves around two key factors – ‘possession’ and ‘territory’. We need possession to be in the game, but once we have possession we must work to gain territory in order to score. We cannot gain possession, territory, or score from the sidelines!

Once we have possession, no matter how little, there are different ways of gaining territory – but in property one of the most interesting to many of us is the use of what they call ‘leverage’. That is the using of your possession to move you further up the field and to gain more territory, without using any or much of your own money. Banks help us to do this.

o We are currently borrowing at 3.1% per annum.
o In two years we have seen property values in Cannes, by our calculations rise by 16% and 38% respectively. Even if those figures are inflated by 100% (which they are not) it represents an impressive return on our (partially borrowed) capital.
o Rentability. If we can help investors cover their mortgages and their other costs, perhaps with a little left over, then the daily equity buildup, the capital appreciation, and the tax advantages combined make for a very profitable investment.
o Our own investments in stocks are worth less now than they were three years ago, and I don’t think we are alone in that! So disappointing.
o The property market in Europe shows steady positive growth, and the likelihood of dramatic change is not high. With property of course the comfort is that even if markets tumble you remain with your property intact. Furthermore, the market is by nature not volatile.
BIG IDEA – BIG POSSIBILITY

Last Friday I got a fax, followed by an e-mail, which have alerted me to a VERY interesting new possible investment. The purpose of this letter is to share it with you and to canvass your interest in it.
I urge you to let me know if you have any interest at all. I don’t think any of us will be able to go for the whole thing, but together we might just be able to do something. I will only correspond further about it with people who do respond to me, so as not to bore you all. (I know that there are a number of individual properties waiting for me to look at and assess when I get back next week, and I will anyway cover those in a Property Letter in the normal way.)

History – A group of mostly Belgian investors bought a property in the centre of Cannes a few years ago and used a developer to build a five floor apartment block with two floors below ground level for parking and cellars.

The developer signed a three year contract in which he promised them a return of 10% on their investment. (Total cost of investment divided by annual income gives a figure called ‘rentability’ in Europe, and 10% is exceptional.) After the three years the investor group chose another manager or management company for reasons that I do not know. For two years they still got close to their 10%, and then it dropped to 5% and last year to 0.8%. Under the new and disastrous management it was no longer viable, and with friction and unhappiness resulting in the group, a number of the partners decided to sell their apartments, and a few to hold on.
What is on offer -There are 30 apartments in the building. All are in mint condition apparently with no work required. 21 are for sale of which 15 are selling as a group and 6 individually. Each apartment has its own underground parking, and a cellar. The position of the block is central Cannes.

On offer a re 9 studio apartments, the smallest being 31 sq.m. and the largest 38 sq.m. Each one has a terrace. There are 9 one-bedroom apartments, the smallest being 38 sq.m the largest 64 sq.m, all with terraces. There are 2 two-bedroom apartments of 70 and 78 sq.m with terraces of 26 and 54 sq.m respectively. There is 1 three-bedroom apartment occupying the 4th floor. It measures 100 sq.m and has a terrace of 31 sq.m.

There is a Guardian’s apartment and a reception area and desk. It is a totally modern building, with air conditioning throughout, and telephone connections from reception to every room.

Lao visited it on Friday and he is enormously impressed with the situation, the condition, and the overall potential of the whole project. I will visit it next Tuesday.

Some of you have met Jacques who has for a while now done the lion’s share of our renovation and maintenance, and organized the cleaning and laundry services of the existing apartments. Some of you have not met him but he’s worked for you. He has already indicated that with his daughter in law he would be interested in managing the whole building, including the apartments of those nine who are not currently selling if they wished to come on board, as a hotel/residence open every day of the year. He spent 9 years operating his own ‘auberge’ inland before moving to Cannes and has the necessary experience and skills to do it.

The total living space (which excludes terr aces, common areas, and built in cupboards etc.) of the 21 apartments is 1014 sq.m and the asking price is €5.5 million. That works out at €5424 per sq.m. The total area of terrace is 394 sq.m. and there are of course the 21 garages and 21 cellars. It is likely that we could negotiate the free inclusion of all the furniture which is there.

I have absolutely no doubt that the price (which is high) is negotiable, and although I have yet to see into the building I know it, and have no doubt either that as an investment, and as a business proposition it is potentially extremely valuable.

Structuring of the business – I would take advice on this, and it depends so much on the responses I get to this e-mail. There are some of you who I will specifically write to for your suggestions, and there may well be someone amongst us who would be qualified and prepared to constitute and manage the shape of the union or partnership if it begins to happen.

Possible scenarios are many –
o One or two investors see it as a great opportunity, and can raise the finance single-handed. That would leave the rest of us out of it.
o Investors bid for individual apartments, in which case we would be unlikely to get the whole lot, and may not manage to get the management side off the ground. However individual apartments in this position I have no doubt would be a good investment, and we would happily take them on and manage them as we do for the other apartments in our group. Without the benefit of size we would have less bargaining power on price.
o An SCI or ‘Société Civil Immobilière’ is a limited liability company made up of two or more shareholders in any proportion, and is simple and in expensive to form, easy to administer, and is designed for the management of properties. Immobilière means ‘the property business’. It could become the vehicle for investors of differing strengths financially and may open the door to the investor who has 10 000€ to invest but would like to be on board alongside the investor who has €1 million. An SCI can borrow from banks in its own right. It must have a French ‘gérant’ or general manager, and I would be able to take on that role if required. The ‘gérant’ does not have to be a shareholder but may be.
o Existing owners like me should be able to revalue and re-mortgage their properties, and may see this as an opportunity to gain ‘territory’ in the field without necessarily having to get rid of their already performing assets. That is ‘leverage’.
o There are many possibilities, but for anyone seriously interested in property in France, I do recommend that we join together and at least explore this possibility. We may discover fatal flaws, but we may equally have a ‘once in a lifetimer’ and we will only know that if we seriously investigate.
Please let me know by return if you are interested at least in the discovery process, and I will then keep you in the information loop. If you are really interested, as I am, to seriously invest if the project looks viable, then you might consider a trip to Cannes soon to look at it, subject to my arrival next week and establishing that all is as it seems to be. I would not let you come if it is not.

I do feel that the pressure is going to be on us. I have little doubt that a unique opportunity like this will be seized upon, and that the sellers will be in a position to actively and aggressively market their building far and wide. At thi s early stage we seem to have first crack, but we could lose that advantage quickly.

I must leave it at that for now, and I await with interest your responses.

With kindest regards,

Guy.

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