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Leaseback/Investment Property Leasebacks, buy-to-let, investment products - call them what you like, the French buy them in the same way that we buy pension plans. In fact that is an excellent way to think of them - in simple terms they are FREEHOLD "property pension plans ". Generous tax-breaks are available to investors who buy into freehold residential tourist hot spots. Paris, the Cote d’Azur, and some of the top French ski resorts all have very attractive buy-to let properties. 19.6 % VAT is refunded from the French Government within 3 - 6 months of purchase and in return you receive a guaranteed rental yield of up to 6.5% NET. France takes it’s 74 million tourists a year very seriously indeed. It’s in the number one position in terms of world tourist destinations, so the French government came up with some investment incentives. The aim was to meet the needs of an ever-increasing accommodation demand triggered by the growing flow of tourism. So What Exactly Is a Leaseback? A leaseback plan is a scheme where you buy a property then grant a management company the right to use it for short-term tourist rentals, this is usually over a minimum contracted period of 9 years. You receive in return major tax breaks from the French administration as well as a guaranteed rental income for the duration of the contract. Anyone can buy a leaseback property - there are no restrictions for non-residents. In return for a leaseback contract to a management company the buyer gets a net guaranteed return of up to 6.5 % net depending on the location. These returns are net during the term of the lease, which means net of the running costs, as well as index-linked. The French banks usually lend 80 % of the property value. By using leveraging, you can invest a relatively small amount and yet reap the gains on a large amount. These are purely investment products for people who want to build up a property portfolio, or property pension portfolio as I prefer to call it. It certainly beats sweating away renovating or running gites in my book! The big advantages are that the investor can accurately calculate his financial commitments over a minimum of 9 years, which as you will appreciate is not possible with a gite. Leasebacks do not suit everyone, because use of the apartments by the owner is strictly limited. Some schemes offer 2-4 weeks free occupancy per year, while others allow you to use it whenever you like but you have to pay the full market rent, less 20%. These schemes are particularly popular with overseas expatriates. If you decide to sell it before the 9 year leaseback contract has ended, you will have to find a buyer willing to take on the lease. On the other hand, these properties are all freehold and in exchange for a 9 years (or more) leaseback contract, most of the mortgage will have been repaid, you have saved 19.6% VAT, the apartment is handed back in good decorative and furnishing order, and you can then move in and enjoy it. Spurred on by low interest rates and escalating property prices, astute investors are using equity release to buy abroad and France is at the top of the bill. The combination of a strong £, a mini stock market bear run and recession in many parts of Europe has also fuelled the flames; with the promise of profitable rewards when the euro-zone emerges from its downturn. Leaseback is undoubtedly attracting new buyers, with the initial purchase price being more competitive than for a comparable resale property as you’re usually committing yourself to buying off plan (that is, prior to construction). You pay a percentage of the purchase price on signing the contract, with several instalments paid at varying stages of construction. The obvious advantages are that the property is virtually maintenance-free, comes furnished and, if you pick the right location, can be rented for a longer period. The financial benefits don’t stop there, either. Buyers can also claim back the VAT charged on the property sale, which in France currently stands at 19.6 % for new homes. On a 150,000 property (approx £105,000), this would save you 30,000 (approx £20,000). During the lease period, owners also receive a guaranteed rental return from the management company, but the most important inducement is your enjoyment of the property free of charge for four to six weeks of the year. So where’s the catch? The return from rental income isn’t that spectacular - currently it’s around six % net - but, if you allow for financial gearing, the actual return on investment, could be around 20-25 % cent, taking into account future increases in capital value over the next ten or so years. Not bad at all. Another drawback is that you may not always secure the rental weeks of your choice, which can mean holidaying, for example, when the complex facilities are crowded. If you’re looking to buy outright, financial
inducements also apply to modern resale property (technically, anything
under five years old) and choice is plentiful. Investors not only benefit
from a lower initial deposit - 5 per cent (as opposed to 10 per cent
for older property) and exemption from property tax for the first two
years, but new property also comes with a ten-year warranty (garantie
decenniale) against defects. Maintenance costs tend to be easier to
pin down because modern homes are built to high specifications, including
under-floor insulation, double-glazing and central heating. As for moving
up the property ladder, you’re unlikely to encounter problems
selling, as the French prefer new to old. |
