A Guide to buying French Leaseback Property13 June 2017
What is a leaseback property?
Leaseback properties, otherwise known as ‘tourist residences’, have been a popular way to invest in French property for more than 40 years. A leaseback property is a property that is owned freehold just like any other, except it is then ‘leased back’ to a management company for a minimum period of 9 years.
Owners benefit from a government-backed VAT-refund incentive designed to encourage investment in tourist residences, guaranteed annual returns from their fully managed and maintained property and relatively low buying costs.
As the property will be used to cater for tourism demand in its location, a leaseback property is sold fully furnished, usually with a parking space and private storage for the owners.
- A freehold, fully furnished property
- Buyer receives a 20% VAT rebate
- Property is leased to a reliable management company
- Investors receive index-linked, guaranteed annual rental returns
- Use it as an buy-to-let investment or holiday home
Why were leasebacks introduced?
Towards the end of the last century, as international travel became more mainstream and affordable, more and more people started to visit France. Its combination of culture, great weather and the variety of destinations (cities, mountains and coastal towns) meant it quickly became a hot spot for international tourism.
As the number of tourists increased, so did the demand for high quality tourism accommodation and this demand soon heavily outweighed the supply. This was compounded by the fact that so many French also take their holidays in France, just as they do today. With tourism being such a huge part of the French economy, the French Government created a way of incentivising real estate which could then be rented out to tourists.
The French Alps was the first place to see this demand and eventually towards the end of the century this model expanded to coastal regions and then into the rural countryside. Governments are rarely generous without an agenda and the leaseback model provides them with much needed tourism accommodation. This is why they offer a VAT rebate on the purchase price, taking the short term hit of lower tax receipts for the long term benefit of the economy.
Governments are rarely generous without an agenda and the leaseback model provides them with much needed tourism accommodation. This is why they offer a VAT rebate on the purchase price, taking the short term hit of lower tax receipts for the long term benefit of the economy. Nicholas Leach
Leasebacks are the solution to France’s tourism accommodation shortage.
The term ‘Leaseback’ can sometimes be confused with ‘Leasehold’ the property ownership structure used in the UK and China. In France, all property is sold freehold and the concept of leasehold does not even exist. Therefore Leaseback property is in fact freehold property but still today they can be confused despite being entirely different.
A leaseback is as it says; a property owned freehold — which is then leased back to a management company in return for a guaranteed rental yield and rental management services. In the UK this style of property ownership is known as sale and leaseback.
Tourism in France
France is the most visited country on the planet
France attracted 83 million foreign tourists in 2012, making it the most popular tourist destination in the world.
According to The World Tourism Organization (WTO) the milestone of one billion tourists worldwide was reached in 2012 and France was no exception to this growth. Its position as the most visited country in the world was held for a third year running. Its increase on previous years was due to the increasing proportion of inbound arrivals coming from countries with emerging economies.
French people also spend their holidays in France
Where else would they need to go? They have mountains for skiing, beaches in the south, beautiful cities and thousands of square miles of picturesque countryside.
- The French population represented 66% of the tourism market in 2012
- The average length of their stay is of 5.3 nights (Tourism Ministry Report 2013 Edition)
The leaseback property market
Successful leaseback properties are always located in areas which appeal to domestic or international tourists. Therefore they are often located either along the coast, in the mountains, in busy urban, towns and cities, and in the countryside.
Seaside and mountain residences alone represent more than 69% of the total tourist residences in France and around 72% of the number of beds.
Who uses leasebacks?
- 50% are families; this can go up to 90% during school holiday periods
- 20% are fiends travelling; tourist residences are very successful among couples and large groups of friends looking to holiday together with numerous activities and a hassle free stay
- 20% are people on business; often attracted by the central locations, conference facilities, 24/7 reception services, internet access. Business stays represent 50% of the total of users of tourist residences in within towns and cities
- 10% are seniors; clients over 60 years old benefit great from the concierege services and on-site facilities, but they are most fond of the simple rental concept and affordable rates
Popular locations for leasebacks
- The most visited city in the world.
- Paris has some of the world’s largest and renowned museums
- The Louvre is the most visited art museum in the world
- Paris hosts some of the world’s most recognizable landmarks
- The Eiffel Tower is the most-visited paid monument in the world
- The Cité des Sciences et de l’Industrie is the biggest science museum in Europe• The ‘La Defense’ area of Paris is Europe’s largest financial and business district
- 15 million tourists per year
- The second leading tourist destination in France
- Benefits from 300 days of sunshine per year
- 115 kilometres (71 mi) of coastline and beaches
- Dozens of golf courses & 3,000 restaurants
- Each year the Côte d’Azur hosts 50% of the world’s superyacht fleet, with
- 90% of all superyachts visiting the region’s coast at least once in their lifetime
- 20 million overnight stays during 2012
- Home to the world’s largest ski area, the 3 Valleys
- Hosted the world’s first winter Olympics in Chamonix in 1924
- Home to Mont Blanc (4,807m) Europe’s highest peak
For the second consecutive year Paris has been voted as the best city in the world for students by the QS Bes Student Cities Survey. Combine this with the fact that Paris has a severe shortage of purpose built student property and it’s no wonder that the government is incentivising student orientated properties in the capital. This is one of Athena Advisors’ most increasingly popular types of property.
Buying a leaseback property
What is the process of reserving a leaseback property?
The process is simple:
- You place a deposit and then the agent (like Athena Advisors) sends you the reservation contract.
- You sign them and send to the developer, who counter signs then and returns them to you.
During this time you have the full power to withdraw from the purchase. Upon reception of the countersigned reservation, the “SRU law” gives a 10 day cooling off period to clients where they can still use their right of withdrawal. Even after this 10 day period, you still have the right to cancel and get your deposit back if you are refused your mortgage application or if the mortgage that you get does not match the criteria you were expecting i.e. lower LTV, change in the rates.
Deposits are secure.
All deposit monies are held in Escrow by the appointed notary and these deposits are fully refundable should anything go wrong.
How much are the purchase costs and what do they include?
If you are taking a mortgage then your purchase costs for a new build property will be in the region of 3.5% of the VAT inclusive price and this will include mortgage registration tax, notary fees, admin costs and stamp duty.
If you are not taking a mortgage then there is no registration tax so the purchase costs will be approximately 2.5%.
If buying a resale property then the notary fees will be 6% for cash buyers, 7% if taking a mortgage.
The main things to consider when purchasing a leaseback property in France are:
- Location: Choosing a good location within a resort, town or city will ensure there is a strong demand for rental and it will also mean it is a nice place to visit!
- Developer: Make sure the developer has a solid track record in building similar properties.
- Management: The rental management is one of the most crucial parts of owning a Leaseback so you need to make sure that the developer is going to use a successful management company, which has a strong share of its rental market. After all, a guaranteed return is only as strong as the company that guarantees it.
Today the laws which govern management companies involved in leasebacks are stricter than they used to be, which means the market is much more controlled.
The very fact that the (notoriously) strict French banks commit to lending on a leaseback project means that they are confident that the management company will be able to sustain the guaranteed rental yields.
There is always a guarantee on construction with Leaseback properties and it is known as the ‘financial guarantee of achievement’. In France the law is very clear. A developer has to have obtained a financial guarantee before any purchaser can become an owner of its property. For off-plan property this guarantee is issued by the bank once the development reaches around 40% of its sales. Before this figure is reached all buyers monies are held in Escrow.
Only once this is obtained can the notary send the final contracts and organised signature of the title deeds for the transfer of ownership. The notary is a government officer and official third party in every property transaction who ensures safe transfer of ownership.
In the unlikely event that a developer should go bust, before the client signs their title deeds (i.e. before the developer has achieved its sales quota) then the deposit monies which are in Escrow are refunded to the client by the Notary.
This protective system ensures a buyer is protected at every step of the purchase process. It also means that, unlike other European counties, should anything go wrong a client’s monies are protected.
What are the on-going costs of owning a leaseback property?
The beauty of owning a leaseback property is that there are minimal on-going costs.
Some developers provide the rental returns as a completely NET figure, net of any costs, maintenance or service charges, and some developers provide the returns as a gross figure. In some cases buyers will have to pay a ‘charge de co-propriete’ (service charge) in the region of maybe €10 to €20 per sqm per year, but this is often already factored into the rental income.
All property owners in France have to pay Tax Fonciere which is in the region of €5 to €15 per sqm per year on Leaseback properties.
Aside from that, the management companies take care of all upkeep and maintenance on an on-going basis and owners are not billed for this.
Once a year, a small cost will be required to engage an accountant to take care of the properties finances, though most management companies can help with this.
The beauty of owning a leaseback property is that there are minimal on-going costs…
Can I get a mortgage on leaseback properties and do I take a mortgage in France or the UK?
If you want to finance your leaseback property purchase is it much more sensible to get a French mortgage. This is simply because you will be receiving your rental income in Euros so this way you will not be exposed to exchange rate fluctuations with when paying your mortgage with your rental income.
The French mortgage market is strict, but only because it is highly regulated. This means that the French mortgage market is consistently buoyant. Athena Advisors is currently able to secure 3.45% fixed rate mortgages for 20 years, representing incredible financial value compared with the mortage market in the UK. Loan to value rates for this types of mortgages are usually around 70-80%.
Will I need to instruct an accountant?
Eventually yes. Initially one will be appointed for you in the first year (it is mandatory to use them) and they usually cost around €250 per year. After that you can choose who to use, but most of the time buyers normally continue to use the originally appointed accountant.
As a non-resident owner of a furnished rental property in France, you will be required to have a tax address in France. This can be acquired through an accountant, who will also manage your VAT statements and tax returns.
Do I have to pay the VAT on a leaseback property and then claim it back afterwards?
No, the developers that Athena Advisors work with mostly pre-finance the VAT, so the price you pay for the property is exclusive of the VAT exclusive value, thus representing a very competitive purchase price.
Rental income & personal usage
How much rental yield will I receive?
Sustainable rental yields over a prolonged 18 year period are usually between 3.5% and 4.5% if managed by a reputable management company with a strong position in the rental market. Management companies offering rental yields much higher than this are often start-ups who have to “dangle the carrot” to attract investors because they don’t have a solid and reputable history.
Assured rental income
The rental income for a Leaseback property is guaranteed by the commercial lease. Even if your property is not rented out a particular week, your rental income will never be affected because of the guarantee provided by the commercial lease.
Most management companies pay rental yields quarterly though some pay bi-annually.
…your rental income will never be affected because of the guarantee provided by the commercial lease.
Rental yields are index-linked
The rental income is indexed link to the French index of rent variation (which can be found at www.insee.fr). This ensures that rental figures increase by up to 3% per year. Most developers cap this at 1.5% or 2% and the increase in rental figures averages around 2% over a prolonged period of years.
This means that the rental you receive will go up over time in line with inflation.
Developers & management companies
Is the property developer/construction company of sound credentials?
This is one of the most important questions a buyer of leaseback property should be able to answer. Leaseback properties should only be bought from construction companies and developers which have a strong track record in delivering similar properties. In many cases investors request to see other developments by the development as part of their own due diligence process.
With projects that require a certain amount of sales before construction can commence, the law governing what happens with a purchaser’s money is strict. An investor’s cash must be held in a secure Escrow account and there is an insurance policy in place which guarantees the build of the property, come rain or shine.
Once that insurance is in place, the developer may draw down the funds from Escrow, but even if they get into trouble, with the insurance in place the development will be delivered as promised.
It is this structure of safety and stability which has been written into French law which has made leaseback property such a secure way of investing in French real estate.
Leaseback properties should only be bought from developers with strong track records.
If I buy a tourist residence within a leaseback development, won't it suffer a lot of wear and tear?
France is the most visited country in the world, a position it has held for more than three years and 89.5% of French people stay in France for their holidays representing over 961 million overnight stays each year. With a rental market as strong as this, it is likely that a property will receive wear and tear as a result of people staying there.
However, it is in the management company’s interest to ensure that your property, its finishes and furniture are kept in tip top condition. Having high quality rental properties that are all finished to an excellent standard will ensure that rental customers keep coming back, thus supporting the rental yields.
It is in the management company’s interest to ensure that your property is kept in tip top condition. That way, people will want to return time and time again.
Developers & management companies
What happens if a management company is late in paying me my rental income?
In the unlikely event of late payment, French law is very strict. Management companies by law MUST ensure the payment of the rent. If there is any sign of weakness, the owner immediately has the right to legal recourse, called “mesures judiciaire conservatoire”. If the management company starts to falter the law stipulates that they must find a replacement company to ensure the rents.
In the few cases where this has happened in France, the problem has nearly always arisen from the fact the original management company did not have enough experience or a large enough position within the holiday rentals market.
In the even more unlikely event that the original management company went bust, the usual result is a larger management company steps in and takes on the project directly. Sometimes the rental yields being offered are reduced slightly, but for buyers the most important thing is that the yields, whatever they are, are sustainable, meaning the development is a success and that they get their money on time,
Returns of around 3.5% to 4.5% are sustainable and have been provided by management companies since the 1960’s, through all kinds of peaks and troughs in the market, without the slightly blemish to their operating record or customer satisfaction.
Selling your leaseback
How will my leaseback property appreciate in capital value compared to a classic ownership property?
Leaseback properties appreciate in line with market value. If you buy a leaseback property in the middle of nowhere with limited appeal and no facilities then it is unlikely to perform well, just as a classic property in the same location/scenario would. However, a well located leaseback property with good facilities in an area of high tourist demand combined with a very strong management company will perform as well as its classic freehold neighbour.
In fact, in terms of capital resale value, there is a strong argument that a premium can be attributed to leaseback properties over and above classically owned property, because a leaseback it is not just a piece of real estate, but rather a long term sustainable income generating asset.
How/when can I sell my leaseback and will I incur any penalties?
You can sell at any time you like either after 6 months or 25 years, it makes no difference and you can resell through anyone that will sell it for you.
When you sell a leaseback there are no penalties and you do not have to pay back any VAT. The person that buys your property buys the freehold and simply takes on the management lease were you left off. Essentially they are buying into a hands-off, hassle free guaranteed rental investment just like you did.
Is there demand for leaseback resale property?
Yes, leaseback properties always have a demand, not just from international buyers, but also French nationals. The majority of French people stay in France for their holidays so the domestic market understands the value of leaseback property.
The most common way a leaseback property is sold is through direct footfall, meaning someone goes on holiday, loves the location, the development and pops into the sales office to enquire if they can buy one for themselves. For properties in good locations one can often notice that there is no glut of resale leaseback properties available for sale online.
In fact in the most successful developments in the best locations it is almost impossible to find any resale opportunities at all. This is usually because the current owners are already reaping the benefits and therefore have no wish to sell their property on.
The majority of French people stay in France for their holidays… they understand the value of leaseback property.
Is it possible to meet with someone face to face to talk through buying a leaseback property?
Of course, please get in contact and we’ll set up a meeting. All buyers, be they experienced investors or lifestyle purchasers, have important questions which they need to feel comfortable they have the answers to. Leaseback property is a tried and tested way of investing in French real estate.
The main considerations when buying a leaseback property are as follows:
- Good location within popular destination
- High quality developer with good track record
- Successful and highly reputable management company
If you have these then the recipe for success is there. Outside of this, French law covers a buyer’s rights across parts of the purchase process, and the overall security of the French banks enables them to provide attractive mortgages.