French investment property - overview

Many investors overlook French property because France has never really suffered a property crash and so there is a perception that there is not any “value.” Dedicated French investment property should be a serious consideration because:

  1. It is long term
  2. It is tax efficient
  3. Rent is guaranteed

Many investors in French investment property have an eye on the long term future because geared correctly a repayment mortgage can be paid off using guaranteed rental income. Mortgage interest can be offset against potential tax on unearned income (rent) and the French government make all property zero rated for CGT after 15 years of single ownership and after 20 years all property related VAT liabilities have been amortized. In effect this means that on completion of the mortgage the property will be owned free and clear and without any French tax liability with a third party, in effect, having paid off the repayment mortgage.

Leaseback

Rather a strange name for this type of investment scheme and the name does sometimes cause confusion but it simply means that you “lease back” your freehold property long term to an established management company. The concept is far from new, it has been around for more than thirty years and as well as being a big part of French personal investment strategy, it has become increasingly popular with foreign investors in recent years. The abridged summary of the scheme is that investors purchase new build, or newly built property and rent it back long term to a management company via a lease arrangement which will last 11 or 9 years and is renewable for up to 20 years. The property is normally purchased by way of a mortgage and the French residents would generally take the highest LTV available and “top up” any differential between the mortgage and rent as a kind of pseudo pension contribution in the absolute knowledge that at the end of the mortgage there will be a tax free, cash sum to liquidate from the property. Foreign investors normally try to gear the mortgage from day one so that rent covers the repayment mortgage and in effect they also end up with a property free and clear at the end of the mortgage having only contributed 20% - 30% of its cost.

 

Broadly speaking there are two types of leaseback:

  • Pure Investment - Lease agreements will normally offer a slightly higher rent and no personal use and are probably the most popular, especially if occasional personal use can be secured for a discounted rate on an ad hoc basis.
  • Lifestyle Investment – Lease agreements will have a lower rental yield and a consideration for one or more weeks of personal use every year. Serious thought should be given before entering into this type of leaseback arrangement as your family motivations are likely to change over the long term. Check if any variation is permitted during the lease term so that you can vary use according to needs, this is not common – but it is always worth asking.

 

Security – Between 2007 and 2010 the worldwide economic crisis did have an effect in France and some management companies were lost. However, many of the management company casualties were at resorts/destinations that were not prime locations and the rent being offered was simply unrealistic. Many of those places now have new management companies and leaseback investors have signed new agreements but at more realistic rental figures. Clearly investors would be upset at the change but the lesson even today is that promises of high rent on new build property should be treated with caution. There is however another side to this coin where a development is complete and operational and the Developer has reduced property price but where the actual monetary rent is the same and thus in effect providing an enhanced yield.

 

French mortgage – Repayment and interest only mortgages are available and rates in France have historically always been lower than in the UK. Terms of 20-30 years are normally available subject to age with mortgages completing at age 65 or in some cases 70. French mortgage applications are full status and based on your debt/income ratio and confirmed from copies of your bank statements (normally three months are required). Not all French Banks lend on all property developments so it is always a good idea to have an idea about what/where you want to invest before approaching a lender.

 

Currency – The ultimate asset (the property) is in France and at the end of the leaseback period and mortgage term you have a choice to continue receiving rent via the management company on personally negotiated term or you can sell the property for a cash lump sum which will be in € Euro. There is an attraction of securing an alternative currency fund in later life and this is an easy and secure way to achieve an alternative currency fund/income.



Who invests? - There is not a demographically identifiable trait in Clients who invest in this type of investment property but broadly speaking they would be:

30 - 50 years of age

Existing property investors looking at diversification

Employed

Already have €Euro funds or looking to secure €Euro in later life

It is a myth that the only people who invest in French leaseback are Francophile in nature, many Clients are simply using the concept to plan their own financial future and many have no personal interest in France, French holidays or speaking French.