Profit from French property
Despite economic uncertainty, UK investors are returning to a longstanding favourite haunt - the French property market.
Prices have 'rebounded' over the past 12 months, according to French mortgage specialist Athena Mortgages, and interest from UK buyers has been growing since the start of 2010: new enquiries were up 72% during the first quarter of 2010 compared with the fourth quarter of 2009.
Stuart Law, managing director of property investment company Assetz, reports a similar trend: "It's not been people searching for bargains so much as ordinary buyers getting fed up with waiting," he observes.
Their position has been strengthened by the availability of cheap 80 to 100% loan-to-value French mortgages, adds Athena director John Busby.
A popular option for buyers looking for an investment opportunity with some holiday use has been a French leaseback scheme, but the schemes have only become part of the UK real estate investment landscape in the past few years.
Investors buy into newbuild developments, typically of 100 to 400 units, in popular areas of France, primarily the south, the Alps and Paris.
The properties are sold freehold, but buyers sign a commercial lease contract pre-negotiated by the developer with a professional management company. Leases generally run for nine to 11 years.
During that period, the property is maintained and rented out for holiday lets by the management company. In many schemes investors can make limited use of their property for rent-free holidays.
When the contract ends, it can be renewed for a further nine years. Indeed, some companies may penalise investors who don't renew - typically by withholding a year's rent - so be clear on the terms and conditions before committing.
What to consider
There are several attractions for investors. First, VAT at 19.6%, which is payable on all newbuild property in France, is fully refunded, although you may have to pay a chunk of VAT if you sell the property within 20 years.
Second, all the day-to-day hassle of property ownership, maintenance and rental is taken over by a company selected by the developer.
Third, the management company pays a guaranteed return, net of almost all costs and rising every three years in line with the French construction index, for the duration of the lease contract. According to Law: "We're now seeing yields of 4% plus, with 5 to 6% definitely doable."
Law points out that investors who trade 0.5 or 1% of their income to use the property for a family holiday are saving on what can be the considerable cost of renting a quality self-catering apartment in peak season.
There are other considerations to bear in mind before you take the leasehold route. For a start, as leaseback is a reliable guaranteed rental scheme, you earn a lower yield than if you found a management company and rented the property yourself, says Law.
Also, it should be viewed as a 20-year commitment to ensure the full benefit of the VAT refund.
Moreover, as Johnson points out: "Those wishing to spend more than eight weeks a year in their property may find the personal use limits undesirable."
Some schemes have lower limits or do not offer the option of personal use at all. Again, it's really important to read the small print thoroughly.
There have been problems for owners when management companies have gone bust.
This happened to lawyer Ed Stanley with his leaseback purchase: "I ended up leading an action group of 80 or so cheated owners, and took the matter through the French courts, and what a crooked path that was," he says wryly.
He warns of "sharp practice and a judicial system that has neither the ability nor the will to bring about effective redress".
He points out that if the management company defaults the guarantees applicable to your rental income may not hold.
And what's worse, he adds, is that pre-July 2009 leases give the management company the right to end the agreement every three years, so they can hold owners to ransom.
"They demand a reduction in terms and threaten no more rent until the reduction is agreed," he says.
Despite these potential drawbacks, leaseback is increasingly being promoted by UK selling agents. So what and where might you buy, and what would you pay? Experience International is selling apartments in the Alpine ski resort of Belle Plagne.
Studios start at €148,000 (£123,000), with 95% finance available and a guaranteed 4.1% index-linked return, plus personal use. Assetz has furnished luxury apartments near Montpelier, Languedoc-Rousillon, priced from around £153,000 offering a guaranteed 5% return.
If you're tempted it's important to look for schemes from the bigger and more well known companies such as Pierre & Vacances, read the terms and conditions thoroughly and focus on the quality and long-term viability of the location.
Can I put a leaseback scheme in my SIPP?
"Leaseback properties are ideal for long-term investors or those looking for property as part of a pension.
"They also appeal to lifestyle investors who love France, as they allow owners to enjoy cheaper holidays over the long term and generate guaranteed income," comments Stuart Johnson, new business manager at investment company Experience International.
However, Law says it can be risky to hold leaseback property in a self-invested personal pension (SIPP), as it may be counted as a residential investment, so will be subject to heavy taxes.
"It's easier and cheaper to keep it outside your SIPP, and you'll get better mortgage deals," he comments.
Busby points out that for your property to be eligible for inclusion in a SIPP, you should not take any personal benefits (including holidays) from it.
This article was originally published in Money Observer - Moneywise's sister publication - in August 2010
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Permanent and absolute ownership and tenure of a property (residential or commercial) and/or land with freedom to dispose of it at will but with no time limit as to how long the property/land can be held (in perpetuity). Freehold is the opposite of leasehold.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
The right to hold or use assets (generally property, but also vehicles) for a fixed period of time at a given price, without transfer of ownership, on the basis of a lease contract. Leasehold ownership of a residential property is simply a long tenancy, the right to occupation and use of the flat for a specified period – the ‘term’ of the lease, which is fixed at the beginning and so decreases in length year by year and the property can be bought and sold during that term. When new, leases are for 99 or 125 years until its eventual expiry, whereupon ownership of the property reverts to the landlord.