Cannes Property Summary – UPDATE OCTOBER 2005

Posted by admin in Property Investment, Property Letters, The Companies, The South of France | October 3rd 2005

We continue to learn here every day:

The more we learn the more we know that we have very good long term prospects in Cannes, doing exactly what we are doing, and doing it very well. 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 three 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 40 or so apartments we have bought are within a stones throw of the Croisette or on 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 be able to offer our accommodation to festival and 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 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 enjoy their investment from time to time, while renting when they are not in residence if they wish, they can sell and enjoy their profit when they are ready, or roll over into a bigger investment and do it all again. The freedom of choice is theirs.

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, the investor or potential investor, and many property agents in order to try to find the best value properties possible. We look at hundreds of them, year round. When we locate a good property we try to match it to the needs of those who are waiting and wanting to buy, or we put the details of the property out in a letter for those who are on the “Property Letter” mailing list to consider. Once someone has decided to make an offer I will negotiate on their behalf if they want me to, agree a price with the seller if possible, and we sign an agreement. Then I help the buyer through the bureaucratic landscape of agents and notaries, through the loan application process, to the signing and transfer of ownership into their name. Some apartments need renovation, furnishing and decoration. We obtain quotes for the work from reliable firms that we regularly employ, and liaise with the new owners about plans and costs. In other word we facilitate a turnkey solution even for investors who never come to France, and many have not yet been.

Lao – is in charge of the marketing of the apartments and Olja is his right hand person taking bookings and dealing with requests as they come in. He forges marketing partnerships with other organizations where it will benefit our investors and controls the servicing and maintenance of the apartments (most of which is out sourced), the meeting and greeting of guests, and the day to day running of the apartments, all with his other two key personnel Jacqueline and Emmanuelle.

Vicky – with her experience is in charge of the accounts, producing statements for every owner each month, and keeping 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 King, an English Chartered Accountant who has lived and worked in France for 13 years, and together they administer our 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. 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 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.

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.
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).
The statistics cover 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.

Capital appreciation update:

Further to the information above, on Friday the 23rd September 2005 the front page of our main regional paper, the “Nice Matin” headlined “Immobilier: +15% dans l’ancien a Cannes”.
The articles and tables which follow show that in “l’ancien” which refers to buildings over 5 years old between June 2004 and May 2005, the increase in values based on sales in the “Cannes Sector” was 17%. Cannes Centre rose by 15%, but the suburbs of the Seafront and Le Cannet rose by 18%, and La Californie by 19%.

Interestingly for us who are involved, the highest increases in the whole region were in Mougins and Grasse at 22% and 21%, and the reason given is that they are experiencing a significant increase in demand due to their proximity to Cannes!

This is an exciting part of Europe to be in, and whereas we all know that past performance is not necessarily a reflection of future performance, the French Riviera has been a “Star” in Europe for 120 years, and there is no doubt that you can not put a price on sunshine and fabulous weather. Furthermore, (without naming names) some of us have traveled a bit this summer and checked on the opposition! The contrast with other heavily marketed “sunshine spots” in Europe in terms of cleanliness, environment, planning, history, culture, services, food and wine, and the list goes on…..is huge.

We are sold on the French Riviera and Cannes in particular. This is the place to be, and very many agree, which makes Nice the busiest airport in France after Paris’ Charles de Gaulle.

17% of all purchases in our region in the year ending May 2005 were by foreign buyers.

Financing:

When we started in 2002 we were borrowing at 4.1%.
Today standard mortgage rates are only 2.75%.
The “interest-only” option requires a deposit on investment of only 20% from European investors and about 50% for Southern Africans, and the rate is 3%.

A very attractive characteristic is that once the monthly repayment has been calculated it does not change irrespective of what happens, making budgeting very easy. If rates change it is the duration of the loan that varies upwards or down by a few months, and not the monthly commitment.

There is increasing flexibility with regard to early repayment of loans after a short initial period, transforming them into different vehicles, revaluing, re-mortgaging, and rolling over and upgrading. Some of our investors are now enjoying the benefits of this flexibility as new and innovative products are introduced. The financial sector in France is modernizing, becoming more competitive, and increasingly customer-friendly at a rapid rate.

Borrowing at 3%, partly self financing through rentals, and reaping a 15% capital growth has proved to be an attractive and profitable investment option for many. Will it continue? Few people are predicting anything more than, perhaps, a slight flattening of the market at some time. This ever-popular region is most likely to remain so for many good reasons.

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. 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 250 000 and 330 000€. 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€
Our consultancy 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 mortgage is higher.
Where more significant refurbishments are required the bank will finance part of those improvements if the buyer wishes.

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. (Re-mortgaging 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 meters in Adderley Street is likely to be priced similarly to any other 20 square meters 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.

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.

Management:

There are so many facets to property management 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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