Investors across the globe are looking to French leaseback properties for a hands-off, stable investment with tax benefits, guaranteed rent and even the possibility for personal use of the property.
How it works
The French government set up the leaseback scheme 20 years ago in order to encourage people to invest towards their pensions, Vanessa Franquin, managing director of Premier French Leaseback and Investments, said.
Some Toulouse apartments fall under the leaseback program
In addition, the government wanted to generate more housing in tourist areas not only for people employed in the industry, but also "for tourists to come and stay and rent and stimulate the local economy," Cecil Jones, president of Just France Sales, said.
Leaseback properties for students, business and senior citizens are available, but properties used for tourism are more popular with overseas investors, many of whom wish to occasionally occupy the property, Franquin said.
From day one, a purchaser of a leaseback property enters into a lease with a company that will rent out and manage the property, Stephen Cheesebrough, managing director with French Property Investment, said. "A leaseback property is a freehold ownership over property that's leased out through a specialist management company."
"They rent out, they manage it for you, they give you an annual tax statement that you file, it's very simple, and you're guaranteed a return of at least...3 or 4 percent after taxes," Jones said.
The percentage of guaranteed rent is agreed upon in the lease contract, and that percentage is revised regularly based on a national index, Franquin said. Some properties will be indexed annually, while others will be indexed every three years, she said. "The more often the property is indexed, the more the rental income will increase over the years."
Traditionally, the rental income is capped so it can't increase dramatically and will instead move in line with the national index, Cheesebrough said.
Purchasing a leaseback property is "a complicated process which takes a long time," Franquin said. Most properties are sold "off plan," before construction has even begun, because they are popular and sell quickly, so it can take anywhere from six months to a year for a sale to close, she said.
In return for agreeing to the leaseback scheme, the investor receives a reimbursement from the government of the 19.6 percent VAT (value added tax) on any new build property, Franquin said.
The VAT reimbursement is written off over a 20-year period, Cheesebrough said.
In addition, "the income that you receive from your leaseback property is entirely tax free," Franquin said. "A leaseback property...is governed by commercial law and a different type of a tax regime...whereby you can deduct all your expenses including the interest that you pay on your mortgage from your rental income in order not to pay any tax on your rental income."
"Thanks to a double taxation treaty between France and other European countries and also the U.S., the U.S. investor would not pay any income tax in the U.S. on the income from his leaseback property either," Franquin said. A traditional buy-to-let property, on the other hand, would require the investor to pay a certain amount of income tax on the property's rental income, she said.
Some leaseback properties offer a limited amount of personal occupancy, while others do not offer any, Franquin said.
Investors who don't wish to receive personal occupancy can expect to receive a higher yield, Franquin said. Properties that offer personal occupancy tend to be more expensive to run, so the yield will be a little lower, she said.
"Your own use of the property is extremely limited because your deal is that you have to make it available to rent," so if a renter wants to use the property, the owner often must step aside, Jones said. "The purpose of the property is to generate rental income, and the company has an obligation to pay you X percent, so they're trying to get as much money as they can."
Investors seeking personal occupancy should pay close attention to the way that is worded in the contract, because each leaseback property is different, Franquin said. "Some properties will offer for instance two weeks per annum, one in the winter, one in the summer...whereas others are more flexible."
A long-term investment
Leaseback properties are a good fit only for investors who are able and willing to make a long-term investment. A leaseback "is not the type of purchase that should be made in order to make a quick buck through selling after a few years of ownership," Franquin said. "Really you shouldn't even think about selling at least until the lease contract is up, which would be...nine to 11 years."
"I often advise our investors to approach it with the mindset to keep it for at least nine years, perhaps even 15 years so you're not liable for capital gains at the end," Cheesebrough said.
Investors who sell early can face big penalties, such as capital gains taxes, returning the VAT reimbursement and repaying the leaseback management company a large amount of the rental income they would otherwise be receiving. "The management company would be entitled under commercial law if it's not specifically stated in the lease...to claim three years' rental income in the event of the lease not being renewed," Cheesebrough said
Leaseback investments can be a nine to 11 year commitment
However, "the laws have changed slightly recently, which makes it more favorable for investors to sell mid-lease," Cheesebrough said. An investor could previously only sell at the end of the lease or face a redemption penalty to the management company, but now investors can sell mid-lease on the condition that the purchaser of the property continue the lease, he said.
If an investor sells to another investor who continues the lease, they are not liable to reimburse the VAT or to pay a redemption penalty, Cheesebrough said.
Most developers have an in-house resale department that charges a commission to handle the resale of the property, and this is often the simplest way of selling a leaseback property, Franquin said.
Modest, stable, hands-off returns
One reason leasebacks are so popular is that they provide guaranteed returns of at least 3 or 4 percent per year after taxes, without requiring too much money down, Jones said.
These returns are "not as spectacular as some other markets," but it is guaranteed, steady and risk-free, he said.
"It's safe. You know what you're committing yourself for," Cheesebrough said. "You know what your rental income is going to be."
Leasebacks are also safe because "the bank guarantees the construction so if for whatever reason the developer was to go bust, then the bank is responsible to deliver the product," Cheesebrough said. "You get the title deed for a property that doesn't even exist prior to its actually being built, so the bank's responsible...for bringing in a developer to complete the construction of the property."
Leasebacks are becoming popular with investors who want a hands-off approach, Franquin said. "They can purchase a property and forget about it almost because everything will be taken care of...and they will be receiving a guaranteed rental income."
"Generally speaking, the management company takes care of all expenses, including the insurance on the property," as well as maintenance fees, water, electricity, rubbish removal, etc., Franquin said.
"The advantage of the leaseback property is it's a hands-off investment where you can sit back and wait for...your capital investment to progressively increase over the years without having any or very little...out of pocket expenses," Franquin said.
Financing and costs
Leaseback properties provide guaranteed returns with a hands-off approach
Many French banks "are now creating finance packages specific for the leasebacks so the clients won't be repaying the mortgage until the property is generating an income," Cheesebrough said. This gives the developer time to construct the property and for the management company to begin renting it out before mortgage payments are due.
The fact that a leaseback property has a guaranteed rental income is an important factor for the bank in lending on the property, Cheesebrough said, but the general lending criteria are similar to classic buy-to-let properties.
Developers usually require a 5 percent deposit to secure the reservation on the property, and mortgages of 80 percent and even 100 percent LTV are obtainable, Franquin said.
A starting price for a studio in a business residence in a strategically placed area such as along the Swiss border would be roughly €80,000, Franquin said.
A small two-bedroom villa in Provence would be approximately €150,000, while a large two-bedroom townhouse would be about €160,000, and a three-bedroom in the town of Aubagne would be about €180,000, Franquin said.
"A one-bedroom property in one of the popular ski resorts could go anywhere from €200,000 to €500,000 in somewhere like Meribel or Courchevel," Franquin said.
"We have just entered a property in Cap d'Agde which is on the Languedoc coast, they're close to the beaches and to the marina...about €66,000 for a studio or €150,000 for a one bedroom apartment," Franquin said.
"Prices vary a lot from one property to another, from one area to another," Franquin said. "It's possible to find a property for almost any budget."
An apartment in a serviced city development can start at around €100,000, Cheesebrough said. The bank may look for a down payment of €15,000 to €20,000, he said, but "bearing in mind that you get back the VAT on that property, it's a question of just financing the €15,000 to €20,000 for an 18-month period, because you get the VAT back."
"The lower end, entry level is around €100,000 for a leaseback property, which will be generating an annual income of...€4,000 to €5,000 per annum," Cheesebrough said.
Some leaseback properties, like a Provence villa, may offer limited personal occupancy
"To use a price per meter squared as an indication on the Cote d'Azur and in prime locations in Paris, we're anywhere from €10,000 per meter squared," Cheesebrough said. "In cities like Toulouse we're...between €3,000 and €4,000 a meter squared."
"So there's a vast range where €2,000 will be the lower end cities or suburbs, lower end suburbs around cities like Toulouse, Marseille, Lyons, which can range up to around €10,000 a meter squared in your hotspots in France, even some of the Alpine ski resorts in Chamonix we can be...€15,000 a meter squared," Cheesebrough said.
Finding leaseback opportunities
Leaseback opportunities exist throughout France, but the properties that are most popular with overseas investors are concentrated in areas with high tourist demand. Investors who are interested in finding leaseback properties can use the Internet as a research tool. A simple search for “French leasebacks” will reveal multiple leaseback companies, such as www.PremierFrenchLeaseback.com and www.FrenchPropertyInvestment.co.uk.
France does not have a national multiple listing service, so investors may wish to speak with multiple agencies that list leasebacks in order to have access to a variety of opportunities. Many of those agencies will include listings of leaseback properties online. As always, it is prudent to perform proper diligence on any agency before deciding to make an investment or purchase a leaseback property. This should include engaging the services of an attorney experienced in French real estate, such as www.StephenSmithFranceLtd.com.