Back to school?
“How much capital appreciation do you anticipate over the next 5 years?” asked Mr. Turnbull as he reviewed plans for a French property development. The agent looks blank. “How should I know?” he thinks, but seconds later replies blithely “It’s been running at 7% for the last few years…..”.
It’s December 2006 and the boom time is still rolling. It is taken for granted that property will just go up and up and up. There were brochures for everything; no money down deals, below market value deals, buy a luxury condo for free – no, scrap that, we’ll pay you!
Property agents became unregulated financial experts with an uncanny ability to predict the future. The better ones would conduct “due diligence” – but realistically how much can be understood from a three day fact finding visit to a country where you don’t speak the language and where you are reliant almost entirely on the developer’s data?
What French property investment – in fact any type of investment – is genuinely about got lost somewhere amidst the coffee table brochures and due diligence fact sheets. The first basic principal of investment is foregoing something today to have something a bit more tomorrow. So unless you have some money to go in and a pretty good idea what’s coming out the other side it just isn’t investment.
There are many good reasons to invest in property as opposed to other asset classes. It is a very durable tangible asset that can provide an income for a long, long time. Property can be passed on from generation to generation. It is hard to steal and can’t be lost or broken that easily. The value is relatively transparent and there is a lot of it, so acquisition costs and financing are mainstream and cheap.
The only thing that REALLY matters in property investment is the income the property will give you. Sure location, property type, tenant profile, market value, personal taste etc. are all important secondary aspects, but in essence it’s all about the cash flow; it has to cost less than what it brings in.
Something that cannot be avoided is the element that property investment involves a good grasp of maths. Figures do not lie and if you cannot be bothered to crunch the figures then property investment is simply not for you.
It can take many forms; if you are young and have a bit of cash sitting in the bank, you can use it to buy a property that will self-finance over 15 to 20 years. At the end of which you will earn it out right and have an income FOREVER. If you are older and have cash reserves, property yields better than any annuity and it can be passed on!
If you have a bit of cash in the bank and a reasonable credit history, low interest rates and the gap between savings and loan rates makes now a good time to look again at property investment. For example, in France you can get fixed rates of 4% and variable rates of 2.5% on property loans. Well-sourced city centre properties with tenants will yield 7.5% gross, which equates to 6% net roughly. Banks are paying savers about 1.5% for their money. Lots of maths – ok – but think it through and you will see how it makes sense.
A genuinely good sourcing agent for French investment property will know the local market intimately and have answers ready to all your questions about property values, rental incomes, management, finance and legal; the best ones will provide you with answers to questions you never thought of asking! A specialist agent for French property investment is highly motivated to get it right, as they know a happy property investor will buy again and again and again.
Buy a property whose value is easily checked and with a demonstrable income. Once you have the primary element in place – the cash flow – it’s important that the secondary aspects all fit. The Languedoc-Roussillon offers a number of positives; notably an increasing population, desirable region, coastal plane with increasing restrictions on land development and space and a well documented public plan for infrastructure development – new trams, motorways etc. Montpellier, the capital, with over 60,000 students has a huge demand with one and two bed units and pricewise, in comparative terms to other major Mediterranean cities, it is highly competitive with one bed units available from as little as €60,000.
So overall, my advice is to leave the crystal ball at home, respect the maths and focus on the cash flow here and now. France is out of recession, yields are good, financing is cheap – it looks like the perfect time to buy….
Paddy Gibbins, September 2009
Paddy Gibbins is a Languedoc-Roussillon based property professional who runs Buy To Let Montpellier (part of Artaxa Ltd) that specialises in both investment property and property search in the region.