Profit from French property

Published by Faith Glasgow on 17 August 2010.
Last updated on 25 August 2011

lease magnified

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

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