Posted by admin in Property Investment, Property Letters, The Companies, The South of France | April 1st 2005

Update – April 2005.

We continue to learn here every day.

The more we learn the more we feel that we have very good long term prospects in exactly what we are doing. Our focus from the beginning has been on properties that you and I might not necessarily buy for ourselves and our friends and family, but on income generating units that have the ability to increase in capital value too.

Increasingly however people are asking us to source properties that they wish to keep as second or holiday homes, and are less interested in rental prospects and more in the potential for capital appreciation, and for enjoyment and personal use. It is a slightly different emphasis and equally rewarding for us and them.

We have visited the Cote d’Azur for many years. However before we started buying two and a half years ago we again travelled up and down the length of it. We looked at Nice, Villefranche which we love, Monaco, Menton, Cagnes sur Mer, Antibes, Baai des Ange, and Juan les Pins. But every piece of investment intelligence we could gather pointed us at Cannes, and within Cannes, at the Croisette. Consequently most of the 35 or so apartments we have bought now are within a stones throw of the Croisette or inside it, and within 15 minutes walk of the Palais des Festival.

With rental properties in mind: We saw very little chance of covering our mortgages from summer and possible occasional out of season rents. We had to get to the festival/conference delegates. Hosting delegates and business people is major business in Cannes, and accommodation is difficult, especially for those who don’t feel comfortable speaking French. Also surprisingly the service and backup offered is generally shoddy, so with a little normal Southern African attention to detail and care, we are already finding that our customers and guests are delighted.

We continue to rely heavily on a great deal of very good professional help and the best advice we can get from our accountants, lawyers and experienced agents in France and abroad, and of course as always from wonderful friends and family.

We are very comfortable with our present business model where all of our investors, many of whom are close friends or family, enjoy complete ownership of their own property or properties. Individual owners can at the end of the day do what they like with them – enjoy them from time to time, sell them, get another agent, or live in them.

Who are we and what do we all do?
We have settled into a natural division of responsibility, the lines of which we cross freely and frequently in order to help each other whenever we need to. However:

Guy and Vicky – communicate with you and the agents (many of them) in order to try to find the best value investment properties possible. We look at literally hundreds of them. When we locate a really good proposition we try to match it to the needs of those who we know are waiting and wanting to buy, or we put its details out generally in a letter for all who are on the “Property Letter” mailing list to have a look at. Once someone has decided on a property that suits them I negotiate on their behalf if they wish me to, agree a price with the seller if possible, and we sign an agreement. Then I help the buyer all the way through the bureaucratic landscape of lawyers and notaries, through the loan application process, to the signing and transfer of ownership into their name. Some apartments that we buy need varying degrees of renovation and/or furnishing and decoration, and we discuss the needs and wishes of the buyer with our very reliable builders. We work with and obtain quotes for the work from one or both of two separate teams that we regularly employ, and liaise with the new owners about plans, costs and transfer of required funds. In other word we facilitate a turnkey solution even for investors who never come to France, and many have not yet been.

Lao – is wholly in charge of the marketing of the apartments. He built our website and I urge you to have a look at it. He adjusts and changes little aspects of it most days – tweaking it to improve this or that aspect. He works tirelessly to forge marketing partnerships with other organizations where it will benefit both them and our investors. He also controls all aspects of the servicing and maintenance of the apartments most of which he out sources, the meeting and greeting of guests, the day to day running of the apartments, and he deals with each owner on issues as they arise.

Vicky – with her experience is in charge of the accounts, producing statements for every owner (who wishes her to) each month, and keeps it all in line with French regulations. Our management company Azur-Accom is a registered French Company, and subject to French laws. She works with Helen Guymer, an English Chartered Accountant who has lived and worked in France for 13 years, and together they administer every aspect of investors’ affairs in France from banking and payments to creditors such as the electricity supplier, water, levies, and local and government taxes to annual income tax returns, and all this of course, only if the investor requires them to.

Katherine – is a very artistic and talented decorator. She does an impressive job with the budget she is given to convert a bare renovated room into a home away from home by furnishing and decorating it with care and originality. (Not all apartments require furnishing as some are bought complete) She travels far and wide in search of exactly what she wants for an apartment that she is working on, and has a real understanding of the costs, and the financial constraints of investors, and yet manages to create something original and lovely every time.

Our rental operation:
It is obviously a snowball. The more people who know about us and tell their friends, the more bookings we get, and we are seeing steadily increasing numbers of repeat visits and people coming to us because we have been recommended to them. It has taken time for this process to gather momentum, and we are doing all we can to speed it up.

Lao and Katherine have their feet well under the table in Cannes after more than two years, and boundless enthusiasm, ideas and commitment. I have no doubt that a year from now we will look back in wonder at the leaps we have taken forward, as we do now when we look back to last year and the two years before when we were beginning.

I love the little story of a shoe factory that sends two scouts to a region of Africa to study the prospects for expanding their business. One sends back a fax saying,
“Situation hopeless. No one wears shoes.”
The other faxes back excitedly,
“Fabulous business opportunity. They have no shoes.”

In Cannes believe it or not (and perhaps in much or all of France) there is very little service! I see a fabulous business opportunity. They offer no service.

On capital appreciation:
We have experienced an increase in property values along the Cote d’Azur and in Cannes in particular, of between 12 and 20%. This we have personally been able to measure by revisiting properties we have seen before, or which are similar to those we bought a year ago, or using bank revaluations. Our own observation is consistent with local knowledge, and regional statistics.

Capital appreciation is what sets property apart for those who believe in it. So I applied to the “Chambre des Notaires des Alpes Maritimes” which is the Chamber of Notaries for our Department of France, for their statistics. Every property transaction in France has to go through a Notary so their records are complete and definitive. I have received a number of pages of records covering the period from the third quarter of 1998 to the second quarter of 2004, but what really interest me are the figures relating to apartments in Cannes specifically, as that is the area we have focussed on.
• Using the fourth quarter of 2000 as a base for the index ( = 100 ) they track each quarter until the second quarter of 2004 ( = 154.3 )
• This represents a steady increase in prices amounting to 54.3% over the 14 quarters.
• Put differently this represents an increase of 15.51% per annum over the period.
That is official and verifiable, and I would be happy to fax or send a copy of the report to anyone who is interested.

The French property market has not been as overheated as Britain’s or Spain’s in the last decade and many of our properties are smaller and highly rentable units in one of Europe’s most marketable areas, the heart of the Riviera. I am confident in the medium to long term, and if we have significant short term gains such as we are experiencing at the moment, I consider that as a bonus. We look to returns from rentals to bring us income, and capital appreciation as a medium term wealth builder.

Why is property good?

Here are a few thoughts:

• You don’t need much of the purchase price in cash to buy the property you want. (Leverage)
• You can buy property worth far more than you are paying for. (Leverage again – using the bank’s money)
• You can often increase the value of the property you buy significantly without spending much on it. (Forced appreciation by way of simple improvements)
• You don’t have to sell the property to reap the benefits of your growth. (Remortgaging or refinancing – further leverage)
• You don’t have to monitor your properties closely from day to day because the market is not volatile. (As the stock market is)
• Property prices tend to increase smoothly and consistently. (Natural appreciation)
• Property has exceptional and privileged tax advantages.
• Fluctuations of any one property’s value relative to the average for any area are very slight. (20 square metres in Adderley Street is likely to be priced similarly to any other 20 square metres in Adderley Street)
• It is not difficult to locate a geographical area or region or city where you are going to do better than the national average.
• It is a relatively simple, reliable and consistent investment, with great cash and wealth building potential. (From rentals and capital appreciation respectively)

Why France?
o Financial Mail – “If you really want to get out of rands and into property, go to
Euroland. French property for instance, is going at bargain prices.”
o There is an increase in demand for rental property combined with a decrease in supply. For this reason the French Government are sponsoring a ‘leaseback’ scheme where they guarantee the owner of rental property a minimum 6% net return, but the term of the agreement is 9 years – a bit restrictive for our own purposes. However, it is designed to encourage supply.
o Many millions of tourists visit France each year. This is not a passing phenomenon, and with the new improved and cheaper transport links, the demand for self catering accommodation in France continues to grow.
o Easyjet, Ryanair and others offer Nice-Paris for €22, and London, Bristol, Frankfurt, Geneva, Stockholm connections for similarly ludicrous prices.
o Finally, we speak French!

And why specifically the Cote de Azur?
It is a fact of Europe today that people are demanding more and more access to sunshine, wherever they may live and work.
The Cote d’Azur has superb beaches, a beautiful sea, a stunning backdrop of mountains and snow, and quaint and ancient villages boasting fabulous cuisine. It is only an hour and a half by car to some of France’s famous ski slopes. What is not so well known is that 1.8 million business trips are made to the Cote d’Azur each year. There are year round congresses, conventions and trade fairs, and over 200 national and international professional events. The development and infrastructure to cope with this growth has been put in place over the last 20 years, and continues to improve. Cannes is undoubtedly the centre of it all.

What are we investing in?
• In most cases we have focused on rentability, and the potential for a good Return on Investment.
• But in every case we have focussed on potential for Capital Appreciation
• Some but not all of our apartments are very small.
• All have a great position.
• Some needed refurbishment and some were recently refurbished.
• Some were sold furnished, some not, and in some the furnishing was so terrible it had to go.
• Most are being bought with a mortgage. The interest rate in France has dropped since we started from 4.1% to 3.2%, adjustable in line with ECB rates once yearly.
• We have made lower offers and have achieved significant reductions in the price of some apartments.
• All of our properties are individually owned (or shared).
• We ask for a 2.5% “finder’s” or consultancy fee upon transfer.

How much do you need to start investing?
Some people choose to buy the apartments outright, some to seek finance, and some share an apartment with friends or family members. South African investors can expect to be offered a 50% or 60% mortgage, and E.U. applicants up to 80%. We are still able to find a few good smaller investment properties for under 150 000€, but the average for a one bedroom apartment now is between 230 000 and 290 000€. A typical investment looks like this:
Cost of apartment – 200 000€ (always includes agent’s fee)
Deposit (40%) 80 000€
Transfer Duty (+/_ 6.5%) 13 000€
Finders fee (2.5%) 5 000€
Some renovations (not always required) 10 000€
Furnishing (not always required) 7 000€
Total investment 115 000€
The investment may be less if you can qualify for a higher mortgage.
Where more significant refurbishments are undertaken, as has been the case in a number of properties that we have bought, the bank will finance part of those improvements if required.

There are so many facets to property management that need to be managed that it is clear that we need first class and full time management on the ground, and that we are able to provide.

The last word:
I am more than happy with our first three years as we are now established as major players in property rental in Cannes, offering guests a better service than is normal in the area, and our owners significant and pleasing returns on their investments. Those have been and remain our aims and objective.

For anyone interested in investment – I hope to hear from you. I will happily send information which is far more detailed than is possible in a summary like this, but thank you for taking the time to read what I have written and I hope you have found it interesting. I would very much appreciate any comments you may have.

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