Is buying a Harlequin property some kind of complicated scheme?
No. It is a simple freehold property purchase. You can choose your property from a variety of 5 star beachfront hotel resorts in 4 Caribbean islands with a number of property types and prices, all being built and operated by one of the largest and prestigious developers/resort operators in the Caribbean. The company is well known and many international celebrities own Harlequin properties. All properties within each of our resorts are part of the resort hotel. They are managed and rented by the hotel.
Because of the importance of the locations, the zoning laws of these hotel resorts means that they have to be available for tourists to rent for most of the year. Holiday homes unavailable to rent and lying empty for much of the year are not permitted.
Being rented out for most of the year creates substantial rental income, as demonstrated by Buccament Bay, Harlequin Property's first 5-star hotel resort opened in August 2010 , which is already occupied for much of the year. This income is distributed to property owners as either (A) guaranteed fixed rental income of 10% of the purchase price for a period of 2, 5 or 10 years, or by (B) equal share of whatever rent the property achieves. Rentals from the same property types are pooled. Because Harlequin Property themselves benefits from an equal share of rentals, they are permanently incentivised in ensuring the resorts perform to their maximum potential.
The substantial rental income generated by these exclusive resorts enables the developer to widen the affordability, and therefore the accessibility of these properties by giving their clients an option of paying just 30% deposit with no more cash to pay. Although this makes it seem like a complex scheme, it is just is an optional facility.
Most of the various properties are off-plan for 1 to 3 years depending on the resort and phase. To encourage clients to buy early and off-plan, Harlequin Property prices off-plan properties at up to 50% discount to current market values. As I write, on plan properties in Buccament Bay and in Blu Hotel St Lucia are also available. Though the upside for capital appreciation in already built on-plan properties or near on-plan, is naturally less.
At completion, local 70% LTV finance is offered and secured against your Caribbean property. It is intended that the completion mortgage will be non-status finance, but this can change with the markets and is not guaranteed. It is expected to be more than sufficient to cover the purchasing/closing costs and any remaining unpaid balance.
The total interest cost of any mortgages, together with annual service/maintenance costs and property insurances are paid out of rental income from (A or B).
So, what remains to understand is how to measure % yield?
Most of our projections, particularly within our Interactive Investment Yield Breakdown Excel spreadsheet, models on 70% occupancy. Given that occupancies in Buccament Bay and Blu St Lucia are often greater than this, the difference permits contingency for under performance.
You can measure yield 2 ways: either by simply taking your annual net rental income and dividing it by the purchase price, or, more commonly, by dividing it by your actual cash investment if, say, you only put in 30%. Even though you are committing to the full 100% purchase price, many investors regard yield to be a measure of cash out divided by cash in. This gives you the actual return on your cash invested.
Net of all costs, our average % annual net yield projections based on 70% occupancy:
A Guaranteed rental income = 10%. Net yields will vary across the islands as running costs such as mortgage interest and annual maintenance fees will vary. Averaging the anticipated costs across the resorts indicates that the guaranteed rental income should be sufficient to cover all costs.
B Rental income to owners after equal share with resort = 39%.
NB. The above calculations were made in 2012. Average yields will fall should property prices increase faster than rental income.
Is this like a timeshare?
No. Harlequin properties are 100% freehold and not timeshare. You own the freehold and can choose to sell-on your freehold whenever you want. It’s is just like buying a freehold property to let out in the UK.
With timeshare, you don’t own the freehold and often the timeshare’s residual value is no greater than the annual service charges.
How secure is the rental guarantee?
Harlequin Property states that it has minimal borrowings and none of its resort land is mortgaged. Harlequin Property’s accountants and auditors is BDO, one of the world’s largest accountancy firms.
What are the risks and consequences of poor occupancy?
Occupancies would have to consistently fall to levels never before seen and to below those levels which existed immediately following 9/11, before equal net room share income could fall to below break even levels.
Interest rates: what if they go up substantially?
Traditionally, interest rates could rise as inflation rises. Should this happen, that same inflation would increase capital values and rental yields. This makes such rises relatively neutral over time. Buyers always have the option of sourcing their own mortgage or replacing the Harlequin Property arranged mortgage, or even paying cash.
How much involvement need I have in managing my investment?
As little as you want. The properties are all furnished to 5 star standards, which is included in the purchase price, and the resort handles every aspect of maintenance and insurances. You just have to decide into which account you want any net income to go. Hence why we refer to these as 'armchair investments'.
What is in place to maintain high rentals and the 5 star status of the resorts?
As Harlequin Property benefits from an equal share of rentals, they are permanently incentivised to maximise rental values. Maintaining 5-star status of resorts will, therefore, always be a priority: Harlequin Property profits once resorts are up and running through the equal sharing of rental income with you. This cleverly maintains Harlequin Property’s permanent interest in the ongoing success of their resorts in ensuring the resorts perform to their maximum potential. Refurbishment and maintenance of the properties are financed from annual maintenance charges to owners, which, in 2012 is estimated to average 3% across the resorts. Harlequin Property states that it expects these figures will come down with economies of scale during the running of the resorts.
Harlequin Property markets the resort quite aggressively. For example in March and April 2012, it is/was featured in Simon Cowell's Britain's Got Talent. Hits to the Buccament Bay website went up 500%.
Harlequin Property has also engaged the services of Andy Townsend as Harlequin Property's Director of The Sporting Academy tasked with attracting high value top sporting events to Harlequin Property's resorts.
Stress tests: what risk analysis is there?
Could Harlequin Property go out of business? Any company or even governments and banks could go under if their debts begin to approach or exceed their assets. Harlequin Property has minimal borrowings and none of its resort land is mortgaged. This was re-affirmed by Harlequin Property on 26 March 2012. Harlequin Property’s accountants and auditors is BDO, one of the world’s largest accountancy firms.
Not hitting occupancy targets? The Caribbean is a year-round rental community. Nonetheless, Harlequin has so much contingency built into their targets that occupancies would have to fall to extremely low levels before they presented a problem. Buccament Bay, Harlequin Property's first resort is already achieving very high average occupancy levels.
Interest rates: what if they rise? Traditionally, interest rates could rise as inflation rises. Should this happen, that same inflation would increase capital values and rental yields. This should make such rises relatively neutral over time. Buyers always have the option of sourcing their own mortgage or replacing the Harlequin Property mortgage, or even paying cash.
What happens when a resort opening is delayed? This can happen and both Buccament Bay, in St Vincent (now open) and The Merricks in Barbados were/are delayed for various reasons, not least the global recession. Its main affect is that it takes longer for you to see a return on your 30% cash investment. There is not much which can be done as many of the causes of delays are beyond Harlequin Property's control. There is a provision in contracts that a refund is given when the developer overruns the target completion date or is in breach of contract. More recent contracts also have a 115% buyback option after three years.
In practice, few clients take advantage of this clause. We believe that this is because the returns and capital appreciation potential inherent in this investment are so great that they were deemed by the majority of clients to be worth holding, even with the delay.
Many of the causes of such previous delays are receding and the resorts are progressing. As you would expect, with the opening of Harlequin Property's first two resorts, the company has much more experience going forward concerning potential delays caused by planning or environmental impacts planning. These are now factored-in when forward planning.
What is Harlequin Property's policy on corporate and social responsibility?
Harlequin Hotels & Resorts is committed to being a responsible and considerate community partner by having a positive economic impact and supporting social development within the locations in which it operates. Harlequin Property aims to design, construct and operate each resort with minimum impact on the environment by ensuring it is protected and enhanced where possible. This will include employing a sustainability strategy for the selection of natural resources for building materials and food, encouraging local sourcing of food and other materials used within the resorts, maximising energy efficiency, minimising water wastage and pollution and reducing transportation of goods to the resorts and guests within the resort.
How are rental income yields calculated?
Guaranteed 10%/annum rental income You can choose this option for a term of 2, 5 or 10 years following which you go on to net room share as described below. Once your property is completed, you receive this sum less any outgoings. The calculation is: 10% of purchase price; less completion mortgage interest (assume 6%), less 1% to 4% closing costs (depends on which resort; assume 4%), less interest on stage payments less anticipated 2% to 4% annual service/maintenance charge (depends on which resort; assume 3%). The sum is then divided by the 30% you invested, leaving you with an annual net rental income yield averaging 7.04% across the resorts.
Variable rental income which we call net room share. This is where the resort shares rental income equally with you. The returns are not guaranteed, but are projected to be far higher than the above guaranteed option. Calculated as: your property rental income; less £25/night for maid service and cleaning, then 50% of the balance goes to you; less completion mortgage interest, less an assumed 4% closing costs, less assumed 6% interest on stage payments, less assumed 3% annual service/maintenance charge. The remaining sum is then divided by the 30% you invested, leaving you with a net annual rental income yield of an average across our range of properties of 37%. The actual figure will depend on your choice of property and the price you paid for it. As prices increase, yield decreases.
[All figures are based on based on January 2013 prices, above assumptions and 70% occupancy. Ask for our interactive Excel spreadsheet which gives a complete financial breakdown.]
These high net yields are possible from the gearing you enjoy by needing only to invest 30%. Even when putting in just 30%, you still benefit from any capital appreciation as if you had invested 100% cash.
Why is the capital appreciation potential so high
Nearly all Harlequin's current property sales are off-plan sales with typically 1 to 4 years to completion. To be successful in selling a property that far in advance, you need an incentive. That incentive is a major discount to current comparable market prices of up to 50%. This gives you a very good chance of your property achieving high growth by completion. Properties bought by early investors in Buccament Bay SVG, Harlequin Property's first Caribbean resort which opened in August 2010, actually trebled in price by completion.
Too good to be true?
We know it seems to good to be true. To try to explain why it isn't, I've broken down the elements which make this such an interesting investment prospect. When you add all the gains together you will see how it is possible to get a net return of between 700% and 900% over 10 years. By way of comparison, a 5%/annum investment bond over that same 10 year term would give a compound return of 63%.
Capital appreciation: Nearly all Harlequin Property's sales are off-plan sales with an average of 3 years to resort opening. To be successful in selling a property that far in advance, there has to be an incentive. That incentive is a major discount to current comparable market prices of up to 50%. This gives you a very good chance of the purchase price doubling by completion.
Occupancy: Harlequin Property employs or contracts some of the best international resort managers and operators in the world today. Harlequin Property's first resort, Buccament Bay, which opened its doors in 2010 and to paying guests in April 2011 already achieve occupancies averaging over 70% and often above 90%. This provides the rental income which underpins the investment yield. Nonetheless, to be on the safe side, we base our rental income figures on just 70% occupancy. If Harlequin Hotels & Resorts achieve more, you make more.
You can invest just 30% rather than the full 100% purchase price: Almost everyone takes advantage of the facility of putting in less money thereby risking less cash. Enabling such luxurious beachfront resort properties to be accessible to so many people is a unique Harlequin Property policy and may partly explain why the company prospered even during the global financial crisis.
Income rental yield: a cash outlay of just 30% means that when calculating annual % yield, any rental returns should be measured against the 30% investment. A simple example: if you invest £100k and earn a net £10k each year, your annual return would be 10%. If, however,you choose to take advantage of Harlequin Property's facilities and invest just £30k cash for that same £100k property, that same £10k earnings each year would give you a net annual yield of £10k divided by £30k = 33.33%.
Your own-use benefits: Investors buying a Harlequin property receive an additional benefit of 30 days free use per year*. This benefit is roughly worth an additional annual 4.5% of the property purchase price. *Excludes SIPP/SSAS pension investors due to HMRC regulations prohibiting benefits in kind.
In summary:You can buy then sell or gift or bequeath your freehold Harlequin property. Its purchase price will begin to increase from when you buy it, increasing faster as completion approaches. Price increases of far in excess of 100% is the norm in Buccament Bay, Harlequin Property's first resort to open. Huge gains are being seen all across all resorts.
We calculate that over a 10 year term, beginning when you place your initial £1k deposit, ending on disposal 10 years later (if you choose to sell, perhaps via Harlequin Property's network) the value of your initial 30% investment, after sales costs are deducted and assuming 10% guaranteed income on completion years assumed to be 4-10, is projected to increase by over 700%. Ask to see our Interactive Investment Yield financial spread sheet to see how we arrive at these figures.
Exiting/selling your investment?
For whatever reason, you wish to sell-on your Harlequin property investment; off-plan or when on-plan.
Harlequin Property has a highly successful and extensive sales network. This network succeeded in selling thousands of Harlequin properties at the height of the global financial crisis.
Why would we give priority to resales? Harlequin sell a lot of property and often short of some properties. They also want to be able to show that whilst easy to buy a Harlequin property, selling it on isn't a mission.
How do we sell a resale? In exactly the same way as we sell a new property. Resales co-exist on our internal product listings alongside new sales. Moreover, Harlequin's sales network is incentivised in such a way to ensure there is no disadvantage to them in selling resales. In fact, as resales were inevitably purchased at an earlier phase in the life of a project, they may well be in better locations - a feature any salesman would highlight. The bottom line is that resales do sell. The sum you realise from the sale will depend upon how long you held the property before selling it. Some investors who sell, do so to buy back into a new lower priced later phase.
Selling a completed on-plan resale property: You can choose to sell via Harlequin's network as described above, bearing in mind that each resort they open will also have a resales listing which resort managers will show to any enquiring guests. Alternatively, you can offer your property to other estate agents to sell as normal.
All material information compiled by propertiesabroad.com, which could be in the form of emails and attachments, associated documents, brochures, downloads or website pages, are summarised, reformatted, rewritten or drawn directly from information provided by Harlequin.
Any Harlequin information we use, will have been supplied to us in a variety of formats: emails over a period of time; blogs; newsletters and websites etc. We then assemble and re-present that same information but in a more user friendly format. Records of source material are kept.
When providing or forwarding such information, we go to all reasonable lengths to ensure that everything we present is as accurate as possible and updated with any new information. However, the sheer volume of information, variety of contributors and frequency of material updates means that some mistakes or inaccuracies are inevitable. Hence why we advise that you must not be reliant upon the accuracy of such information for a decision to purchase and that such information does not form part of any ensuing property purchase contract. As a matter of policy, we advise anyone considering a purchase to take independent professional advice.
We use the term investment in reference to freehold property purchase and not to securities as regulated by the FSA. Other than in general terms, we cannot give you specific advice regarding a pension as this must be provided by an FSA regulated IFA.