Vanessa Franquin
Franquin, 46, is British and has lived and worked in France all her life. A qualified press-officer, Vanessa has a professional background in PR and events organisation and worked for many years in Paris and Monte Carlo before coming to real estate in 2000 when she worked in France for a London-based company. Her love of France and its regions and her knowledge of the French lifestyle and language give her a unique insight into business practices in France. Since 2000, she has regularly attended professional seminars and training courses to broaden her knowledge of all aspects of the French property market and to qualify for a French realtors’ licence.
NuWire: Why should an investor...be excited about the real estate market in France?
Franquin: France is a lifestyle choice....The French property market is stable. It's an entirely secure western European economy. There is a constant...sensible growth rate so that you don't have real estate bubbles as you would have in certain other areas of Europe. I think that most people, when they invest in France, know that this is going to be a safe long-term investment. They know that France is the most visited country in the entire world with over 76 million visitors every year. It's a country which is beautiful all over....Every single region...has its own beauty. So I think that most people who invest in France are people who are attached in one way or another to the French way of life, history and culture and of course, the beauty of the French countryside and landscape, which is immense.
NuWire: How has the market in France changed over the last few years, and how do you see it changing in the next five years and beyond?
Franquin: The market in France has changed quite substantially over the last five years....The average increase in property values in 2007 is estimated at roughly 3 percent, down from about 15 percent three years ago, so you see that there has been a decline in the growth rate but...there is still a growth rate....and these figures do not concern the Paris region or the French Riviera, which are a world of their own and where property prices continue to rise at a rate of about 10 percent per annum. However, the leveling of property prices on the whole is quite good of course because it would also indicate that this is becoming a buyer's market as opposed to a seller's market.
Since December 2005, the official market rate from the European Central Bank has gone up from 2 to 4 percent. This doesn't seem to have had much of an adverse effect on the property market....The banks are waging ferocious competition to offer attractive rates, and the cost of borrowing money is still reasonable in France.
The French Ministry of Finance has published figures indicating that the fundamentals are good. Unemployment is decreasing, public spending is satisfactory and buying power is increasing in France.
NuWire: I know you work with a lot of foreign investors. Can you tell me about your work with them?
Franquin: We work mainly with investors from Europe, particularly from the U.K. and from Ireland....The leaseback scheme has been known to them already for about five to seven years, and it's becoming increasingly popular with investors who don't want to have to have a hands-on approach to their investment in the sense that 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. We recently had more and more inquiries from the United States....We've had several American clients.
NuWire: As a foreign citizen, are my property rights any different from those of French residents?
Franquin: No, not at all. They're exactly the same....Anybody who purchases a property in France has a title deed and is 100 percent freehold owner of their property, which includes leaseback properties, which are freehold properties.
NuWire: Do you think an investor should use an attorney in acquiring their property in the market in France?
Franquin: I would certainly say so if you were going to purchase a classic property, particularly I think that you'd have the property surveyed, which French purchasers do not usually do, but overseas investors would be well advised to do so because...they might not know some of the pitfalls of purchasing a resale property which may have some faults, but a leaseback property is generally speaking purchased off plan, therefore brand new, has the 10-year builder's warrantee, and is therefore relatively...free of any pitfalls. However, everything is written in the contract, and one problem that might arise is that some developers who are not particularly focusing on the overseas market do not translate the contracts....So some people may feel more secure if they have legal help in their own country from an independent advisor who would be able to...read through these documents for them.
NuWire: Can you talk a bit more about [the leaseback program] and possibly touch on its strengths and weaknesses and how it works?
Franquin: The leaseback arrangement is a tax-efficient property investment scheme, unique to France, designed to provide supplementary retirement income or capital in the event of a resale and in some cases a holiday home for a few weeks every year.
A property sold under what is known as “the leaseback scheme” is commercial property and the lease contract guaranteeing the rental income is governed by French commercial law. "Leaseback" is in fact a tax status applying to the property owner (in France, this is known as LMNP, Loueur en Meublé Non Professionel) which affords the owner a certain number of tax benefits, beginning with the full refund of the 19.6 percent VAT on new build properties.
Only a certain type of property can be purchased under this status: listed tourism residences, business residences for corporate travelers, retirement homes (with or without medical care) and student halls, and these have to provide a certain number of compulsory services such as linen and managed reception. It is widely recognized that there is a shortage of this type of accommodation in certain regions of this country and the government therefore offers various incentives to individuals wishing to invest in these.
At any given time, a number of properties are available under this scheme, ranging from a villa in Provence, a cottage in the Lot, an apartment on the Atlantic coast, to a business residence in a major city center or a chalet apartment in an Alpine resort. There is something on offer for all investor profiles.
The lease contract varies from property to property....The initial lease will generally run for nine to 11 years, and you are expected to renew at least once for a further nine years.
Sometimes overseas investors do not know about the tax benefits tied to this investment: when purchasing a new build property under this scheme, you receive a full refund for the 19.6 percent VAT (value added tax) normally charged on new property and the income that you receive from your leaseback property is entirely tax free. It's tax free in France because you are able to offset all your expenses including the interest on your mortgage, transaction fees and any other costs incurred.
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....Compared to a traditional property investment, i.e., not a leaseback property investment, if you were going to purchase a buy-to-let property, you would have to pay about 25 percent income tax on your income from the property. So this is the major difference worth noting.
As for the drawbacks to this type of investment, since this is a commercial property, it's not a property that you can necessarily use any time you want to....Each leaseback property is different, some properties will offer personal occupancy as part of the lease agreement, while others won't. .
I would say that [from] an overseas investor's point of view, the first important aspect to consider is whether you want some personal occupancy from your property. If you don't, then [you] can expect of course to obtain a higher yield from your property, and if you do, the yield will be marginally lower. The lease contract will include all the details and should be studied carefully before entering into an agreement.
Investors should also know that purchasing a leaseback property is quite a complicated process which takes a long time. I would say six to eight months on average and sometimes even longer, and this is because properties are mostly purchased off-plan and it takes a little longer for an overseas investors to obtain a mortgage in France. A responsible property agent will guide you through the process to ensure that [it] is as smooth as possible.
NuWire: And how is that process any different if somebody is selling a leaseback property?
Franquin: It is quite easy to sell a leaseback property when it is already built to an investor looking for an immediate return on his investment, but very few investors want to sell if they can avoid it and there is a real shortage of resale properties. Most marketing agents have their in-house resale department and will deal with the resale of the property on your behalf and charge you a commission and this is the simplest way of selling a leaseback property.
A leaseback property should be viewed as a medium- to long-term property investment designed to provide supplementary income in the future and will realize its full capital growth potential when it can be sold on the open market at the end of the lease term(s).
NuWire: With your work with international clients, do you suggest that they acquire property insurance on their leaseback properties?
Franquin: This will be specified in the lease. Generally speaking, the management company takes care of all the running costs and maintenance fees, including the insurance on the property.
NuWire: Is financing available for investors who are interested in purchasing a leaseback property in France?
Franquin: Financing is available. French banks will lend quite readily to U.S. investors.. On most properties, certainly the properties that we market, it's possible to obtain up to 100 percent [financing] on the ex-VAT price of the property....Most investors would generally prefer to borrow 80 percent of the ex-VAT price of the property because obviously it would mean that the...monthly mortgage repayments would be lower and the guaranteed rental income would go further towards covering the monthly repayments.
NuWire: Which areas in France in your opinion currently offer the best overall opportunity for investors who are interested in purchasing leaseback properties?
Franquin: There are...three different types of leaseback properties available, but of course, generally speaking, it is the residential type properties that appeal the most to overseas investors, and these are all located in areas...which have a high tourist attraction....So these areas can be the Atlantic coast all the way from the north to the south, from Brittany down to the Aquitaine and the Gascony region, along the sandy beaches of the Atlantic coast.
They can be in any of the mountainous areas such as the Pyrenees or the Alps which are very popular with overseas investors. The Alps of course have always had a powerful attraction to overseas investors because of the...quality of the properties there and the potential for capital appreciation in the famous mountain resorts.
The Mediterranean coast of course is extremely popular but properties here are becoming difficult to come by. I think that the leaseback property market has reached saturation point on the Cote d'Azur and the southeastern part of the coast, so it's increasingly difficult and certainly more expensive to find properties on the Mediterranean coast, there are, however, some interesting renovation projects underway, sold under the leaseback scheme.
Brittany and Normandy are traditionally very popular with U.K. investors and there are some interesting opportunities there, quite often on or near to a golf course.
Some of the areas now...where there is still room for development and which are becoming more and more popular with visitors from all over the world are the Languedoc-Roussillon region, the Provence of course which is traditionally very popular, also the Dordogne and its bordering regions such as the Lot, the Limousin and the Midi-Pyrenees, which are up and coming areas of France and are growing increasingly popular while prices are still very reasonable.
And also of course some of the more, famous areas such as the Loire Valley where it is sometimes possible to find properties, although they are few and far between.
So somebody who is interested in purchasing a leaseback property really has to choose from what is available since there are not necessarily very many properties available at any given time. And when they come onto the market they sell quite quickly so it is necessary to be ready to move forward rapidly when you do decide to purchase a leaseback property and that you find one in an area of your choice.
NuWire: Of those different areas that you mentioned, which would offer the highest yield rates?
Franquin: Well, the Languedoc offers some of the highest returns because the actual yield is dependent on the cost of the price of the land. The yield on an investment will be paid on the price of the property, excluding the portion of the price of the property which is the land. This can be explained because when you purchase a piece of land in France, of course the price will vary depending on where the land is situated, whereas cost of construction is more or less the same anywhere you go. So the higher the cost of land, the lower the yield is likely to be.
So if you want to purchase a property on the Cote d'Azur in one of the prime areas, close to the coast, then the yield will hover around 3 percent or 3.5 percent. If you go to the Languedoc where the price of land is more reasonable or to the areas further west...or the Pyrenees where the cost of land is increasing but still more reasonable than the Alps for instance, then the yield could be as high as maybe 4.8 or 5 percent., If you wanted to invest in a a business or a student residence, you could expect to obtain a higher yield in certain areas where there is a need for this type of property but where you wouldn't necessarily want to stay yourself.
NuWire: Which areas of the ones that you mentioned would offer the best long-term prospect for capital appreciation, and why?
Franquin: I think that capital appreciation is always quite a complex matter....There are regions in France which have known a very high rate of capital appreciation over the last 10 years. These of course [are] Paris, the Cote d'Azur, and the major cities such as Lyons and Nantes and some of the areas along the frontier borders, particularly the Swiss or the German borders. French investors are currently looking at growing cities of under 20,000 inhabitants where prices remain attractive and where there is a real potential for development and capital appreciation.
But the French market is not so volatile as the U.K. market or the U.S. market I believe....It can be expected in an area where there is a very high level of capital appreciation over a certain number of years that it will eventually calm down and settle before it then starts to rise again.
So I would say that today if you look at an area which is within close proximity of some of the areas that have known the highest growth rates—in Provence for instance, if you take the example of the village of L'Isle sur la Sorgue, which is a very famous and has become very popular now with the jet set... this is now beginning to reflect on the areas which are in close proximity and where prices are still very reasonable, but not for long.
You make money from a property when you purchase it, rather than when you sell it. Purchase at a good price now and in an area which is an up and coming and you are more likely to make capital appreciation from your property than you would if you were to purchase today in an area...where the price is already very high.
NuWire: Are there any common mistakes that you've seen investors make in this market?
Franquin: I think that the common mistake would be to think that a leaseback property is a short-term investment...where you would purchase and then want to turn around and resell in maybe five to 10 years.
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...[with] very few out-of-pocket expenses.
So I would say that this may be the most common misgiving that you can have your cake, in this case a guaranteed tax-free rental income, and eat it, that you can purchase a property like this and turn around and sell in little time and make a lot of profit, well, that's not the case with a leaseback property....It has to be looked upon as a long-term investment.
Really you shouldn't even think about selling at least until the first lease contract is up, which would be...nine to 11 years.
NuWire: How much money would you suggest an investor needs in order to get started investing in France with leaseback properties?
Franquin: If you obtain 100 percent financing for the ex-VAT cost of the property, then it's...possible to start with very little. As a rule, investors usually contribute about 20 percent of the value of the property and when the VAT is refunded this will cover the initial outlay.
NuWire: Can you generalize a few average leaseback property prices in some of the different areas that we've talked about?
Franquin: Prices would range from about €80,000 to €140,000 to purchase...a studio or a one-bedroom apartment in a well-located business residence in, or close to, a major economic center.
In Provence or in the Languedoc, a two- or three-bedroom townhouse in a well equipped luxury development would be priced between €150,000 and €250,000.
The cost of a one-bedroom property in one of the popular ski resorts could range from €200,000 in one of the better known high-mountain resorts to €500,000 for a resort like Meribel or Courchevel.
As an example, a property in Cap d'Agde on the Languedoc coast, close to the beaches and the marina where studios came at €75,000 and one-bedroom apartments at €150,000 sold out on the day it was launched.
So prices vary a lot from one property to another, from one area to another. And it's possible to find a property for almost any budget depending on what the investor is seeking to achieve....The higher the level of investment obviously the higher the level of income will be.
NuWire: As an investor looking at entering into a leaseback deal, what are some of the things in your opinion that an investor should look out for, and what language do they need to make sure is included or excluded as part of the deal, as part of the contract?
Franquin: The first thing that you need to look at, obviously, is the yield. And then you need to look at how often the rental income is paid, this is generally quarterly, and how often the income is revised, generally annually, to follow the official rent indexation level, but this varies from one property to another and the lease contract should be thoroughly checked before purchasing a property.
Generally speaking, business properties or senior citizens' residences or student residences will benefit from a higher level of indexation than the residential type properties, so this essential point is something that has to be looked at prior to deciding on a property since, of course,...the higher the level of indexation, the more the rental income will increase over the years. The official index figure is published...by the French Official National Statistics Bureau and was 3.23 percent in 2006
