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17/04/07 - Julius
Nehorai's speech at First National Real Estate Forum |
I see from the
programme that I am described as an International Property Expert. Such
knowledge as I have acquired has mainly been from practical experience. As
an agent I’ve sold in excess of $100 million of apartments and villas in
Cyprus, Portugal and the Caribbean over the last 8 years. When I take on a
new project I ask myself, would I be prepared to buy there? As a result I
have the opportunity to get in as an early buyer, off-plan and have built up
a small portfolio of residential properties in London, Cyprus, Portugal,
Malta and Saint Lucia.
At the moment I am concentrating on the Caribbean, a fast growing area which
appeals to both the UK and US markets. It’s been fascinating listening to
the presentations earlier today. The inescapable conclusion is that it’s
time for the Maltese Real Estate investor to start looking abroad. 800,000
Brits now have a place in the sun, up 45% since July 2004. What is the
relevance of this? The Englishman is buying more and more properties abroad.
I have clients who have bought in several destinations like myself and who
own 4, 5 or even more properties. By comparison, it’s interesting to note
that Malta has the highest number of built dwellings per 1000 inhabitants of
any country in the EU. Does this mean the Maltese have over-invested at
home? From the number of developments in the pipeline is there a danger of
over development in Malta? Is this telling you to follow the English and
look abroad?
Here are my criteria for investing.
1. A well-established local developer behind the project who has both deep
pockets and a good reputation.
2. A warm year-round climate in an economically and politically stable
country.
3. A good local infrastructure to support tourism. i.e., regular flights
from major international airports, good restaurants and other amenities such
as golf, amusement parks, health-spas, hotels, beaches etc.,
4. The project must have additional features to support the Real Estate such
as a hotel, Golf, Spa, Beach, Tennis etc., to attract tourist rentals.
5. A benign tax regime without penal rates of capital gains tax and
complicated Inheritance Tax rules.
There are so many countries that fit this criteria that I wonder why people
are lured to new unproven tourist destinations such as the Eastern bloc
countries and parts of Asia, where the risk is much higher. In Thailand, the
recent coup means that foreigners who had bought real-estate in a company,
as they all did are now forced to hand over control of the company to local
nationals. This takes their assets out of their own control and puts them at
risk. I go to several property exhibitions a year and I’m amazed at the
proportion of stands selling the Eastern bloc and Bulgaria, often 30-40% of
them. Right there it’s telling you there is a risk of over-development. Many
buyers depending on rental income to pay their mortgage are going to be
disappointed. Buyers are attracted by the promise of selling at a fat profit
when completed but the developer has the next phase of his own properties to
sell so, has little interest in pushing resales. There are some good
developments in Bulgaria and the Eastern bloc which my fellow Maltese agents
are selling but in my view one needs to do very careful research before
investing in many of these new destinations.
In my experience a property purchased off-plan that meets my criteria has
appreciated 20% or more between signing the contract and completion about 2
years later. This is the value added by being able to offer a property
that’s finished and ready to walk into.
Payment for an off-plan purchase is typically 25% deposit on signing the
contract with the balance, usually paid over the period of construction. One
method of assessing if the deal is financially sound is to choose ones where
the initial deposit is paid into escrow until construction begins as opposed
to those developments that depend on the buyer’s funds to finance
pre-construction costs. Usually, a mortgage can be arranged locally although
some markets, not as well developed, charge higher rates of interest than in
Europe. Many a time, the developer will provide a choice of different
furniture packages and sometimes it is obligatory to buy one of these if the
property is to be put into a rental programme. It saves the hassle of having
to furnish the property and usually, top interior designers will have been
used and the furniture bought in bulk, so the price is better.
Many of the projects I sell, and where I have bought myself are investments
that come with a Rental Programme. For example, if there are 100 identical
units in a development and every owner puts his property in the rental pool,
each one would get 1% of the income. The percentage is set at the outset
based on the value of the property in relation to all the properties in the
pool. It’s a way of ensuring each owner gets a fair share. The management
company takes a percentage of the revenues to handle the rental operation.
Sometimes this is a completely independent professional hotel management
company. Each owner is entitled to use his property for a given number of
weeks a year, usually between 4 and 8 weeks depending on the particular
development. There are many variations to this theme. Some come with a
guarantee of the income for the first 2 years or so; some have a more
flexible approach as to how often the owner may use it. Some associated with
hotels limit the use to 4 weeks a year because they need the accommodation
as part of their hotel stock. While it is usually a freehold purchase, it
comes with a separate agreement to provide it for rental.
I’m going to show you a few examples. I recently returned from 5 weeks in
the Caribbean. I spent some time at Jalousie Plantation in Saint Lucia, a
UNESCO World Heritage site set between the twin Pitons, an extinct volcanic
crater some 2 million years old. This is a former a former Hilton resort set
in 50 acres that is being redeveloped. Villas are from $600,000 to $2
million. If you buy a property in this very exclusive 5* resort, you can use
it 4 weeks a year, worth $22,000 annually for a couple. For the remaining 48
weeks the villa must be given to the hotel for rental. The management
company share the income and give a guarantee of not less than 5% p.a.,
return for the first 4 years. It’s a great property investment, a nice
income, capital appreciation and 4 weeks holiday a year.
Closer to home, Aphrodite Hills in Cyprus is now a convenient direct daytime
flight on Emirates Airline. It’s one of the best golf courses close to
Malta. Wonderful Buy to let properties is available with a 5% guaranteed
income for 2 years, from $360,000 for a 1 bedroom apartment to $590,000 for
a 3-bedroom unit. The resort has a beautiful spa, golf, tennis and a host of
other amenities and boasts Intercontinental's flagship resort hotel in
Europe.
Back to the Caribbean, The Landings in Saint Lucia is an exclusive marina
development of some 220 apartments. Interestingly, its sister development in
Barbados, the renowned Port St. Charles was the winner of the Mercedes award
for the best Marina development in 2003 while Portomaso was the runner up.
The Landings does not provide a guarantee but it has a leading US Resort
Management company handling the rentals and confidently predicts returns of
6-8% p.a., while allowing owners 6-8 weeks use a year.
I live here in Portomaso and I like marinas as they provide a unique feature
to the real-estate value so, I chose to buy at The Landings. It has
excellent amenities including concierge service, 4 restaurants, a spa,
tennis and water taxis as well as a very flexible rental programme.
Oops what’s this? Don’t know how this got in here but it’s me and my wife
having a last dip in one our properties we sold last year!
The Caribbean is a fast growing area for real-estate. It appeals to the
Americans who are reluctant to travel far from home. Prices are in US$ and
it’s largely English speaking. Travel from both Europe and the US is
convenient. It’s an area with great natural beauty and a year-round good
climate. Most islands are politically and economically stable. The greatest
risk is perhaps the weather but any development of quality is built to the
Miami Hurricane Codes, the most demanding standard in the world. Hurricane
insurance is affordable and usually paid from the rental pool. Many islands
grant tax concessions to attract overseas investors such as a ten year
period when income from the property is tax free. Most islands allow you to
buy the property in a corporation which makes it virtually capital gains tax
free.
These are just a few of the projects that are available. Of course there are
many more than the ones I handle. Today, the world is becoming a village.
People buy second homes because travel is easy, cost of living is usually
lower and technology has shrunk our world. Like I do, people can live in the
sunshine in a taxation-friendly country and carry on their business
overseas. There was a day when we thought of the village as our community,
then it became a country, now it’s become a continent but soon it will be a
universe. Low cost airlines and the internet have put most of the world
within easy reach. It is time to re-evaluate our market place. It is no
longer within our own environment. Today’s savvy real-estate investor needs
to take a world view.
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