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One of the options being floated is that  Ireland should consider leaving the euro. This to me would be a disaster. If the Irish left the euro and converted back to the punt, the currency would depreciate rapidly against the euro. For simplicity, lets assume 1 euro = 2 punt. That would lead to an export boom, since overseas buyers could purchase Ireland’s goods for half the previous price. The flip side, is that everything you import is also twice as expensive.

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More importantly, Ireland would have to earn 2 billion punt for every 1 billion euro owed to the EU, the IMF and other international creditors. They could never hope to do that and Ireland would have no choice but to default on these debts. The bond markets would shun Ireland for years - would you lend to a person who already defaulted on previous loans?

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This would lead to a severe liquidity crisis as a huge number of businesses and individuals would wish to withdraw their money from Irish banks and deposit it elsewhere.  Those who didn´t act quick enough would see the value of their savings wiped out as the punt depreciated even faster against the euro. Companies like Microsoft, Dell, Facebook, Ebay & Intel would all run for the hills, probably the hills of Poland.

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In other words, I cannot envisage any scenario that would see Ireland volunteering to leave the euro. There is far too much to lose.

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What happens if Germany goes?

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With Spanish, Italian and even French debt causing market jitters, a much bigger worry seems to be that Germany will cut its losses and leave the rest to fend for themselves.

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Looking at the bigger picture: if Germany leaves the euro and converted to dmarks, the dmark would appreciate rapidly against the euro (as a euro without Germany would be much weaker) and their exporters would suffer a lot. A strong export economy is very important to a country like Germany with comparatively low domestic demand.

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Additionally, the value of all the hundreds of billions of euro loans they´ve lent to other EU countries and banks would depreciate against the dmark. This double blow would be extraordinarily painful for the German economy and they would wish to avoid it at all costs.

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In the coming year, Germany´s choices may boil down to (a) leave the euro and suffer the consequences outlined above or (b) stay in the euro and use its strength to guarantee the debts of weaker EU economies. While they certainly don´t want to guarantee the debts of weaker EU economies, my feeling is that they will ultimately prefer to do this than suffer the consequences of leaving the euro or letting it fail. It is becoming increasingly obvious that hundreds of billions of euros will either need to be guaranteed or written off by third parties like Germany, and it will be an incredibly messy process.

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Nobody, not Germany, not France, not Holland, is going to guarantee the debts of Greece, Italy, Ireland, Spain etc. if there is the slightest chance they could simply spend their way into trouble again in 5 years time. In other words, they would insist that these countries hand over some of their power to tax and spend.

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Even if there was the political will to do this (which there isn´t), many countries would be constitutionally obliged to put this to their citizens via a referendum, which would almost certainly be rejected.

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If and when the cost of borrowing for Italy and Spain creeps up towards the 7% range, this will all come to a head (again). A way must be found for Germany & France to guarantee the (enormous) debts of these countries without putting their own finances at risk.

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This is definitely possible, as the overall EU debt as a percentage of GDP is a managable 88%, compared with 98% in the USA, 200% in Japan and 83% in the UK. The annual EU deficit would be approx 4% of GDP, far lower than the 10% in the US and 8.5% in the UK.

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At a time when the American congress is as polarized as it has ever been, it is worth noting that the Europeans have a certain genius for coming up with messy, drawn out compromises that get the job done.

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Colin Murphy, Director

Torcana.com

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In good times and in bad, the lowest prices will always be available in low income areas with poor transport links, low owner occupancy, high levels of foreclosures, high levels of delinquencies on community fees and lots of deferred maintenance.

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Chasing a low purchase price with a high rental yield is what I consider to be a “too good to be true” strategy. Your rental income isn´t going to be very reliable in these kinds of areas. Tenants here are less creditworthy, less responsible and more transient. This will lead to high vacancy periods, high management fees and high repair costs. Finding a profitable exit strategy for that kind of property five years time will be difficult if not impossible.

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The best investment locations, in good times and in bad, are those closest to the best schools, jobs and amenities where young families and professionals rent, live and buy property. For these reasons, they will never be the cheapest properties on the market, but they will certainly be the most stable.

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A person seeking a reliable rental income and a solid exit market should choose properties with the following characteristics:

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1. FHA financing available to owner occupiers

2. Low foreclosures levels

3. High owner occupancy and low vacancy levels

4. Low levels of delinquencies and deferred community maintenance

5. A satisfactory HOA reserve to cover future maintenance work

6. Close to quality schools and major employers

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Junk mail filter

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If you are receiving a dozen emails every week with deals that all look great - just ask the seller to confirm the above and you´ll very quickly find out which ones are duds.

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The six bullet points above are obvious, anybody could come up with them after a few minutes thought. The trick is finding properties that match these characteristics and securing them at a competitive price. That´s not so easy and not many people are doing it.

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There are different levels of risk in real estate, and plenty of ways to earn a living from it. Not everybody will agree with my take above. That´s ok - one size doesn´t fit all in this game.

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However, if you happen to agree with me that the most viable strategy is to buy in locations where people pay their rent and bills on time, where the amenities are well maintained, and where banks are already lending to owner occupiers, then you´re going to love our next product launch. See http://www.torcana.com/newsletter-41.htm for further details.

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Riots in Britain, the USA losing its AAA status, emergency bilateral meetings in Europe in the middle of holiday season …. August isn´t usually this eventful is it? Let´s have a quick recap.

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On Friday 5^th August Standard & Poor (S&P) downgraded America´s credit rating from AAA to AA+. On Monday 8^th stock markets across the globe took a huge dive. On Wed 10^th, the Fed Reserve announced that it would keep interest rates at virtually zero for another two years, producing even more schizophrenic reactions from the markets.

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Who´d want to be a trader in an environment like that?

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Witnessing these crazy reactions makes me very grateful to have time on my side. Torcana, and the majority of people reading this newsletter have a huge advantage over the professional money managers who are having minor heart attacks on a daily basis.
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Unlike them, ordinary investors don´t have to report to shareholders every quarter. They don´t have to engage in accounting trickery to make balance sheets look good. They don´t have to explain their every move or consider every action in terms of how it will be perceived by others.

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That makes a big difference over time. When professional money managers base their decisions on what might happen tomorrow or next week, an ordinary person can do very well by just staying calm and planning a year or two ahead.

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Personally, I don’t understand the violent reaction from the markets to the downgrade from AAA to AA+. No new information was released by S&P - they were just acting on what everybody knew already. It´s also crazy to think that the US was less credit worthy on August 5^th than it was couple of weeks prior when politicians were flirting with a default.

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That being said, a stock market correction has been predicted for several months now. Markets have been too frothy for too long. Perhaps the protracted political bicketing over the debt ceiling and subsequent downgrade was simply the emotional trigger needed.

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Ironically, the market reaction to the downgrade of American debt has been to purchase ever more amounts of American debt. They won´t earn any income from these assets - the yield on a two year treasury bond is a miserly 0.19%. However, the money managers happen to be very worried this month and that means running away from risky assets and choosing the liquidity and safety of treasury bonds.

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Economists will say the market is rational - that´s a misleading way of putting it. A market will mirror the emotions of people within it, and they seem to be wildly emotional these days.

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This is the sixth most visited country in the world and tourism is growing at a breakneck pace. It is home to tens of millions of young and well educated people. It is the 9^th largest recipient of foreign direct investment, well ahead of more hyped up rivals such as Brazil, Mexico and Thailand. It is the 15^th largest economy in the world and the only big economy to have matched China and India´s eye watering double digit GDP growth figures last year.

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This country recovered very quickly from the financial crisis, and its banking system is extremely robust. In fact, Moody´s, Fitch and Standard & Poor have been quietly upgrading its credit rating, while generating headlines for doing the opposite to others.

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In its biggest city a property boom is in evidence everywhere. Thousands of new residential and commercial towers are springing up in practically every district. This is not Dubai - there is no speculative bubble driven by foreign investors. Demand is being driven by locals who want somewhere to live.

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Real estate prices in this balmy Mediterranean climate are less than half the price of similar properties in Spain, France or Italy.

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In my opinion, this is the most exciting real estate market in Europe by a mile. It is probably one of the hottest markets on the planet.

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The country I am referring to is Turkey - a democratic, secular, republic with an incomparably rich and ancient cultural heritage.

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With a population of 75 million and an average age of just 28, Turkey has become a major tourist destination with almost 30 million visitors a year (more than the UK).

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It´s economy expanded by 11% between Q1 2010 and Q1 2011, the third fastest in the world.

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Turkey is a prominent member of the G20, a long standing member of NATO (2^nd only to the US in troop size) and is in full membership negotiations with the EU.

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Istanbul is one of the largest cities on earth, and with a population of over 13 million it is significantly bigger than both London & Paris. Despite its vast size, this is a magical place with an incredibly rich and exotic history, having been the centre of the Ottoman, Byzantine and Roman empires. Like Rome, Istanbul is perched on seven hills and you´ll find countless terraces and rooftops beckoning you to relax, beverage in hand, and admire the spectacular views of the harbor and famous Bosporus strait below.

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Istanbul skyline

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What surprised me most on this trip wasn´t how culturally rich Istanbul was. I was fully aware of that from previous visits. I was more taken aback by how modern and cosmopolitan the city had become.

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Let me illustrate by way of example from two of Turkey´s biggest passions – shopping and sport.

Example 1: Shopping

The main shopping street in Istanbul is called Istiklal. Picture a pedestrian version of 5^th Avenue in New York or Oxford Street in London and you´re in the same ball park. Istiklal Avenue is lined with boutiques, cafes, consulates, restaurants, cinemas, banks, churches, mosques and high end residential apartments. Young girls wearing skimpy summer skirts and t-shirts mingled freely with older generations wearing a traditional headscarf.

Istiklal Avenue, Istanbul

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I was there at 10pm on a Wednesday evening and it was packed with shoppers. When I left my restaurant at 11.30pm, the streets were still busy and the shops were still doing brisk business.

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Example 2: Sport

Turkey is a football mad country and it has been playing professional football for well over 100 years (there are four professional leagues here, including a ladies one). The two most famous teams, Galatasaray and Fenerbache, are both from Istanbul. During my trip, I was fortunate enough to have been invited to join some local businessmen in their pitch side seats in Galatasaray´s brand new stadium. We watched a friendly pre season game between Galatasaray & Liverpool.

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Liverpool famously won the Champions League final in Istanbul in 2005, so their supporters have fond memories of this city. Choruses of “You´ll never walk alone” were ringing out loud and clear before the kick off. Unfortunately for them, they were totally and utterly drowned out once the game started and the crowd deservedly roared their approval before, during and after a convincing 3-0 victory over the former Kings of Europe. This was a “friendly” game but the atmosphere was as exciting as any I´ve experienced in the big stadiums of Spain and England. The ticket prices are also comparable, but that didn´t seem to deter the local supporters in the slightest - the 55,000 capacity stadium was packed.

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Galatasaray v Liverpool

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After the game, I travelled back into the city center with their boisterous supporters using an ultra modern (and air conditioned) metro system that puts London to shame.

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Turkish Real Estate Market

The purpose of my visit to Istanbul was to check out the local real estate deals. History, shopping and sport aside, the following is what I most like about Istanbul: it has a booming economy, a massive population of upwardly mobile young people, a huge gap between demand and supply, dozens of extremely large and cash rich construction groups and a host of banks keen to lend to both locals and foreigners at low interest rates and flexible terms.

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Demand for high quality rentals in Istanbul is huge and it is not unusual for rents to increase by 5-10% annually. I´ve read through independent market reports and believe investors can achieve net yields of 7-8%, with many promoters guaranteeing these rates for the first two years.

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In my view, better known real estate markets like Spain, Ireland, Italy and even the UK all look sluggish and overpriced when compared to Turkey.

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I visited eight different projects during my visit, most of which were located in well heeled neighborhoods to the north west of the historical city center. Some were fully complete, some were half way through their construction and others had barely started digging the foundations.

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One of the completed projects I visited

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Generally speaking, spacious 1-3 bedroom apartments can be purchased pre construction from just €65,000 / $90,000/ £55,000 and they would be worth significantly more on completion. Prices can be fixed in USD, GBP, EUR and Turkish Lira. A 30% deposit is placed after reservation and the remainder can be financed on completion from a range of local Turkish banks at a 6% interest rate over 15 years.

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I know of one company in particular who is expecting to disperse roughly 150 foreign mortgages in the next 6 weeks from overseas buyers. Once I verify that they were processed without any major hiccups or surprises, I´ll be getting very bullish on this market and will most likely offer a choice of several developments for investors to participate in.

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Prior to that, I´d like to invite approximately 50 investors to join our pre-launch list . These will be the first people to receive detailed information packs on Turkey, Istanbul and the first projects we will release.

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If you would like to join our pre launch list, just send an email to investments@torcana.com with Turkey in the subject line and please include your name and a daytime contact number.

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Kind Regards

Colin

]]> http://www.torcana.com/blog/2011/08/the-hottest-property-market-in-europe.html/feed http://www.torcana.com/blog/2011/08/10-reasons-why-i%c2%b4m-still-betting-on-florida.html http://www.torcana.com/blog/2011/08/10-reasons-why-i%c2%b4m-still-betting-on-florida.html#comments Fri, 05 Aug 2011 14:35:45 +0000 admin http://www.torcana.com/blog/?p=573 In my previous newsletter, I outlined my thoughts on the EU/US crisis and why I felt business in Florida will carry on regardless.

Here are ten reasons why I am still betting on Florida real estate:

1. As of June 2011, there were 10,559 homes available to purchase in Orlando though the multiple listings system (MLS). This is 35% lower than the June 2010 inventory (16,304).

2. If you´re wondering why good deals seem harder to come by this year compared to last year, then look no further than the fact that Orlando condo inventory is down a dramatic 54% year on year. There are only a few hundred available to purchase.

3. The median sales price of a normal (i.e. non-foreclosed) property has increased an incredible 40% year on year, from $112,000 (£68,225) to $158,000 (£96,250). There has been a corresponding drop in the numbers of bank owned properties available in the open market.

4. The current pace of sales is equivalent to just 4.3 months supply, the lowest since 2005. A lot of prospective buyers will say that they are waiting for the bottom of the market. In my view they’ve already missed it.

5. One in five Canadians are interested in US property, according to a new survey by BMO Bank of Montreal. Aside from the Canadian dollar appreciating 18% against the greenback in the past five years, the house prices in the locations they tend to favor (Tampa, Phoenix, Miami) have fallen far faster than the US average.

6. Between March 2010 and March 2011, almost a third of all Florida sales were to foreign buyers, up from 10% in 2007 (NAR). Generally speaking, the USA is still by far and away the largest recipient of foreign direct investment.

7. Orlando´s median home price (which is a good barometer for Florida as a whole) is now $94,950 (£57,850), the lowest level since 1997. Reserve at James Island units are available at this exact price, but I can assure you the quality and location is far above the average.

8. According to a recent report from the Harvey University Center for Housing Studies, 16 million new housing units will be needed to meet population growth and shifting demands. That would mean household formation, currently at 500,000 per year, will need to reverse its recent trend and get back to the 1,000,000+ per year we witnessed in the years previous to the financial crisis.

9. There is going to be a surge in demand for smaller homes, as an estimated 3.8 million baby boomers will be looking to downsize in the next decade. There are an estimated 50 million baby boomers in total and a disproportionate number of these will be attracted to the warm climate, low cost of living and quality of life of Florida. Immigration growth will also continue to stimulate demand.

10. Despite all the turmoil in the markets, there can be few who doubt that Florida is a diverse, wealthy and resilient economy with a safe and secure legal system that has been protecting foreign buyers for decades.

Kind Regards

Colin

Property needs to be considered above all at micro levels - you need to know the individual neighborhoods very well. However some important nationwide trends include:

• - The ratio of house prices to rents is now well below its pre bubble level
• - Vacancies are at a three year low
• - Analysts expect rents to rise by 4% this year and next (The Economist)
• - New foreclosures were 18% lower in Q1 2011 than Q1 2010
• - The US economy added 600,000 new jobs between Feb-April and 1.3m new jobs in past 12 months. That is the rough equivalent of the UK adding 120,000 new jobs in 3 months.
• - In Q1 2011, for the first time in 4 years, more mortgage borrowers caught up with their payments than fell further behind.

What are your thoughts?

I´m very interested in your thoughts on the issues and trends discussed in this blog post. Do you agree or disagree with my take on the current market?

Regards

Colin

Let me describe one of these lower income communities that came across my desk recently. I did some basic due diligence and number crunching on it. On first glance it looked ok - an Orlando gated community with swimming pool, fitness center, children´s playground etc. Units ranged in price from $38,000 - $45,000 and net yields were 7-10%. Many of Orlando´s main hotspots were within a 15 minute drive.

What´s not to like?

Plenty as it turned out. The HOA reserves were hopelessly inadequate to maintain the facilities and the building structures. Almost 50 of these units were in foreclosure or short sale with asking prices way below what was being offered to me. Average household income was one of the lowest in the city and the crime rate was very high. Most of the leases of the tenanted units had expired or were about to expire. Driving around and through this neighborhood was like something out of The Wire, a gritty TV show based in Baltimore.

Perhaps you´re not too bothered about the condition of the property as long as it´s generating a 10% net yield? I mean, it´s not like you´ll be asking your mother to spend the summer there minding the kids right?

However, you might want to consider the following: the rents will decrease because there are too many vacancies, your HOA will increase because too many people aren´t paying their monthly dues. Your repair bill is going to be high because the properties are nearly 30 years old and these tenants are much more likely to break stuff than those renting in a wealthy neighborhood like Dr. Phillips /Bay Hill. You will also have vacancy periods every single year due to tenants regularly leaving and/or refusing to pay their bills on time.

In other words, that +10% net yield can turn into -10% quicker than you can believe. After all, we´re only talking about +/- $4,000 per year on a $40,000 property.

As for capital appreciation? Forget it. You would do well to sell a property in this community for the same price you bought it for in 5 years time. That doesn´t include the stress it will have caused or the hole it will burn in your wallet every year with those negative cash flows.

Because Torcana would like to continue doing business with you in 3, 5 and 7 years time, we refuse point blank to move down the food chain. This model just doesn´t suit buyers who aren´t local experts and most of our clients live a long way from Florida.

If we don´t have anything available in a decent middle class neighborhood for $70,000, we will promote something in a high class neighborhood for $140,000 instead. It´s a higher purchase price, but it´ll be a big property in a prime neighborhood - i.e. you get what you pay for. It will also be a hassle free purchase that will provide a reliable income and sell at a handsome profit in years to come.

Regards

Colin

Many condo investors, especially those of modest means, are now faced with three options in the Orlando market. The first is that you continue trying to find good value properties in this $60,000 - $100,000 range. As I outlined in issue 38 and issue 39 of our newsletters, this is now extremely difficult due to a lack of supply and oversubscribed demand.

If the first option of purchasing units ranging from $60,000 - $100,000 is very limited, the next obvious option is that you move further up the food chain and purchase higher quality properties located in the best neighborhoods in the $95,000 - $150,000 range.

There is a decent selection of these available to those in the know and they offer very solid cash flow and excellent medium term capital growth. Best of all, they will be the first to provide equity release and resale opportunities when mortgage lending makes its long overdue recovery. This last point is crucial. There is a very strong school of thought that always advocates buying the best properties in the best locations wherever possible.

The third option is you move down the food chain and source properties in lower income neighborhoods in the $35,000 - $50,000 price range. Some of these look like unbelievable bargains compared to what they were selling for in 2005/6. Appearances can be very deceptive with these deals though. Experience and gut instinct tells me that most properties purchased in low income areas towards the end of a recession will generate highly irregular income and will take an unacceptably long time to generate meaningful capital growth.

One of my chief concerns (and gripes) right now is that there are respected companies out there promoting properties for $35,000 - $50,000 in neighborhoods that are just one or two steps up from the ghettos. It´s only a matter of time before a British tabloid publishes an article accusing a big property agent of selling dodgy properties and conning downtrodden families out of their life savings.

Kind Regards

Colin

I´ve written this article as a guideline to those considering a purchase in Florida. While property prices are at record lows and incredible bargains are available, it is just as easy to make the wrong purchase decision now as it was during the boom years.

Many of these tips are universal and can be applied to any property market. I would imagine that a lot of our readers would adhere to this criteria automatically but its always useful to present this type of information in an easily digestible format.

Here are my top ten tips:

1. Do your homework on the neighbourhood

2. Visit the property yourself, or have someone you trust do so

3. Check out the rent roll

4. Foreclosures: Make sure the number is manageable

5. HOA Reserves: Make sure they are adequate

6. Budget for repairs and vacancy periods

7.Closing and running costs: Make sure you know what they are

8. Get a decent management company and be aware of all fees

9. Get a referral from the selling agent

10. File your tax returns

1. Do your homework on the neighbourhood

You can look up the average household income and crime statistics for any neighbourhood in a matter of minutes and it could save a small fortune. Imagine that you´ve a choice between one property selling for $50,000 in an area with an average household income of $25,000 and another property selling for $60,000 in an area with an average household income of $40,000. You´d be much better off paying $10,000 extra for a better rental and resale market.

2. Visit the property yourself, or have someone you trust do so

An advert promoting a $30,000 property within 12 minutes of Disney might sound like a no brainer. The thing about Orlando is that nearly every neighbourhood, good and bad, is within a 10-20 minute drive of hotspots like Disney, Universal Studios, Sea World and Restaurant Row.

Like most big cities, great neighborhoods with huge mansions can be less than a mile away from horrible ones with rows of boarded up properties. You need a lot more than Google maps to determine if the location is good or not.

3. Check out the rent roll

If you are buying a pre tenanted property with the aim of earning a regular income, then ask to see an up-to-date copy of the rent roll. This provides invaluable information such as how many units are vacant, what each unit is renting for, when each lease started and when each lease will expire.

4. Foreclosures: Make sure the number is manageable

The more stable a community it is, the better for all home owners. If you are thinking of buying a unit in a community of 300 homes and 80 of them are in foreclosure, you could be in for a rocky ride. These properties will probably be sold for much less than what you´re paying for yours and rented out for less than you can afford to rent yours out for. Try and buy somewhere where less than 10% are in foreclosure.

5. HOA Reserves: Make sure they are adequate

In Florida, all condo home owners have to pay HOA fees which usually range from $200-$300 per month. Your Home Ownership Association (HOA) is responsible for looking after the common areas and facilities of the whole community and insuring the common areas and exterior structures of all buildings (i.e. walls & roofs).

Ask for a copy of the HOA accounts before purchasing a unit. This should tell you how many people are paying their HOA fees and what reserves they have in place. If either of these is inadequate, you could be in big trouble as your fees will be increased dramatically if a) the clubhouse roof needs to be replaced and they have insufficient reserves or b) not enough people are paying their fees to maintain the resort on a monthly basis.

6. Budget for repairs and vacancy periods

All properties, from the very top to the very bottom of the food chain are going to have vacancy periods and repairs that will eat into your income stream. Budget at least one month’s rental income each year being spent on these issues. Older properties, cheaper properties and properties in low income neighborhoods will have much higher vacancy and repair costs than newer properties in middle class and upper middle class areas.

7. Closing and running costs: Make sure you know what they are

For properties priced in the $50,000 - $150,000 range, you should budget approx $2000-$2500 to cover basic legal and title insurance. Running costs include HOA, real estate taxes, property management and home insurance (optional but highly recommended).

8. Get a decent management company and be aware of all its fees

A professional management company that manages your property and your tenants well over a number of years is worth its weight in gold. In almost every scenario, it does not pay to appoint a small inefficient company who undercuts bigger and larger competitors with cheap commissions.

The better your management company is at doing his/her job, the happier the tenant will be and longer he/she will stay. All management companies charge additional fees for placing a new tenant or renewing the lease of an existing tenant, so you should make yourself aware of these and input them into your calculations.

9. Get a referral from the selling agent

If your agent has been in business for a few years, he/she should be happy to put you in touch with a couple of satisfied clients who can verify that they are happy with the service received. This is especially important if you are dealing with overseas agents who are promoting properties in an area where they are not based full time.

10. File your tax returns

All property owners in the USA must file tax returns in the USA every year, even if the property is not earning any income. Overseas residents will need to get a tax number (ITIN) and a non resident social security number. This is a very simple process and filing returns every year shouldn´t cost more than a couple of hundred dollars and there are plenty of specialist companies who can take care of everything for you.

Regards

Colin