For centuries, people from across the globe have been drawn to France by its beautiful countryside, food, wine, history and culture. For long-term buy-and-hold investors, France’s more than 80 million tourists each year generate a healthy demand for short-term rental accommodations in many areas of France.
“France is the most visited country in the entire world,” Vanessa Franquin, managing director of Premier French Leaseback and Investments, said. “Most people, when they invest in France, they know that this is going to be a safe long-term investment.”
For many investors, “France is a lifestyle choice,” Franquin said. “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 and…the beauty of the French countryside and landscape, which is immense.”
“There is a lifestyle here which cannot be duplicated anywhere else in the world,” Cecil Jones, president of Just France Sales, said. “It’s not just a European lifestyle, it’s a French lifestyle, which is unique…and the beauty of the country and the quality of food and the wines, the warmth of the people, the beauty of the countryside, the ease of transportation.”
“France has this eternal appeal that keeps drawing people to it, and soon it’s going to be drawing the Russians and the Chinese and the Indians, which in turn is going to be driving up prices,” Jones said.
The French property market went through a dip during difficulties between France and the U.S. about the Iraq War, but it has now recovered and foreign investment is on the rise, Jones said. “The number of foreign buyers in France in general has doubled over the last 10 years, and particularly in Paris, where in some of the better parts of Paris, the number of Americans…has really leapfrogged.”
In some of the better parts of Paris, 25 percent of the buyers are foreigners, Jones said. “There has been a definite and substantial increase in the number of foreigners buying in France.”
While some of that is driven by lower-level investments by British investors in southwest France and Brittany, there has also been a large amount of investment into high-end properties by American, British and Irish investors, and Russian and Chinese investors are beginning to make their appearance, Jones said.
Many Scandinavian investors have been entering the property market, Jimenes Bruno of Nice Properties, and author of AboutFrenchRiviera.com, said.
“We have more customers than properties. It looks pretentious but it’s not,” Bruno said. “That’s the reality of the market. We have on our database more prospects than product. Because when a product comes on the market and the product is good, the product goes straightaway and at the right price, too.”
The way the real estate system is structured in France also helps to make the market secure and consistent, Stephen Cheesebrough, managing director with French Property Investment, said. “It’s very much a market for…medium- and long-term investors….The buying fees and the selling fees associated with property restrict…short-term speculating in the property market.”
“The French property market is stable. It’s an entirely secure western European economy…you don’t have real estate bubbles as you would have in certain other areas of Europe,” Franquin said.
In addition, demand from French buyers has increased with slightly relaxed lending criteria, Cheesebrough said. This means people are able to buy at a younger age, “so that means there is an increased in demand for property just from the…domestic market as well as for the international market.”
France recently elected a new president, Nicolas Sarkozy, who is pro-business, pro-American and pro-growth, Jones said “I think it’s a very good environment for investment….There’s a very optimistic feel over here economically.”
“I think that 2008 is certainly going to see France moving in the right direction with regards to the property market. The president that’s now in power is making all the moves to ensure that will happen,” Cheesebrough said.
Buying and selling process
France does not have a comprehensive multiple listing service, so investors seeking property should look at listings for a variety of agents to find opportunities that interest them. Unlike in the U.S., multiple agents can list a property and have sales rights to that property, Cheesebrough said.
After selecting a property, the buyer signs an agreement of sale with the seller and puts down a 10 percent deposit, Jones said.
In America, the complicated documents are completed upon closing of the sale, while in France, this happens up front in the agreement of sale document, a fairly complicated document which includes all of the conditions of the sale, Jones said. Once both parties have signed, “there begins a seven-day cooling off period whereby the buyer—not the seller, but the buyer—can walk away from the deal for any reason or without any reason…and get every penny back in a short period of time.”
“Once the seven-day period is over, the buyer is locked in unless, just as in the U.S., unless the buyer is willing to lose the deposit, the 10 percent deposit they put down,” Jones said. The buyer then has a certain period of time to obtain a mortgage, usually around 45 days, and the notaire gathers and organizes all of the necessary documents so that closing can happen on schedule, he said.
Every transaction must pass through a notaire, a French lawyer who’s been specifically trained in real estate law, Jones said. The notaire is an independent party and is paid out of the transfer fees for the property, which are usually 7 or 7.5 percent of the acquisition price, he said. Transfer fees of 7 or 7.5 percent may sound high to American buyers, but they make for a safe, secure transaction.
“The notaire system is very strict in France, and violations or breaches of…competence, where the notaire fails to do his job correctly, are very heavily punished,” Jones said. “So there’s a very high level of competence and professionalism that goes into the process so that when you acquire property you’re satisfied that the title is in correct order and…all the Ts have been crossed and the Is dotted.”
The real estate commission is usually 5 or 6 percent of the price without the value added tax (VAT), Bruno said.
Foreign buyers of French property have the same property rights as French citizens, Franquin said. “Anybody who purchases a property in France has a title deed and is 100 percent freehold owner of their property.”
Investors can purchase property as an individual or a couple, or they can form a French real estate corporation called an SCI, which operates as a corporation where people hold shares, Jones said.
“If you’re just buying a property without any particular concern for how it’s passed down to your children—you want them to inherit, you want your spouse to inherit, you would buy…as an individual or as a couple and just have a French will so that things pass on as you want them to,” Jones said.
However, buyers who have children by a prior marriage or who want to be sure that one child gets more than another or that a spouse gets everything and the children nothing can avoid French inheritance law by purchasing with an SCI, he said.
While France’s high transfer fees and capital gains taxes help to provide market stability by discouraging flippers, they can take a big bite out of the profit for an investor who finds it necessary to sell without holding for a long period.
For non-E.U. residents, the capital gains tax is 33.3 percent for the first five years, after which it decreases by 10 percent each year, Jones said. A after 15 years, there is no French capital gains tax, although there could be some in the U.S., Jones said. For E.U. residents, the capital gains tax is 26 percent.
The French VAT is a 19.6 percent tax on the renting and the price of new construction properties, Bruno said.
France also applies a wealth tax to equity that exceeds approximately €775,000, Jones said. While the tax is not onerous, it is worth taking into account on larger purchases, he said.
“Once you get beyond the acquisition, which can be more expensive than some countries, the property taxes are considerably lower than what we’re accustomed to paying in the United States and in England,” Jones said. “A property that here would be worth $2 million, perhaps the annual property taxes are a couple thousand euros. It’s negligible, as opposed to in the United States where it could be $25,000 a year.”
Insurance and management
Property insurance in France is compulsory, Jones said. “You have to show homeowners’ insurance before closing in order for title to be transferred.”
Homeowners’ insurance is simple to acquire and is about two thirds of the rates in the U.S., Jones said.
Property management is a good idea for overseas investors who rent on a consistent basis, Jones said. It is possible to develop a relationship with a local French person who will maintain the property for a lower cost, “but for a rental property that’s doing a lot of renting, it is good to have a professional company.”
“It’s easy to manage the property, to find competent people to manage the property at reasonable rates, to manage it while you are overseas,” Jones said.
Management companies will usually charge between 8 and 10 percent for a yearly rental, Bruno said.
“Management fees will vary substantially according to the quality and extent of the services,” Jones said. A good quality company that provides rental changeover, cleaning and laundering, meet-and-greet service and on-call service would probably charge between $250 and $400 in Paris and between $150 and $450 in Provence, Jones said. (As of Sept. 18, 2007, €1 was equal to $1.3984 U.S.)
Financing is easily available in France for qualified foreign buyers, Jones said. The process is not difficult or complicated, but borrowers should bear in mind that the normal mortgage term is usually from 10 to 20 years rather than 30 years, he said.
Many U.S. investors opt for financing in France because a French mortgage is required for those who want to be able to offset the interest paid on the mortgage against the income produced by the property, Cheesebrough said.
“French banks will lend quite readily to U.S. investors. It’s possible to obtain up to 100 percent finance on some properties,” Franquin said.
Banks usually want 20 percent down from a foreign buyer, but “it is theoretically possible to put zero down over here, if you have extremely good credit,” Jones said.
“Interest rates are between 4 and 4.5 percent on variable rate mortgages, and fixed rate mortgages are just over 5 percent at the moment,” Cheesebrough said.
It is not difficult to qualify for financing, but “you have to prove that you earn three times the amount of the loan you’re going to take; you have to show your last taxes records for the last two years,” Bruno said.
Life insurance is required on French mortgages, and this can get complicated for older buyers, but there are strategies for dealing with that, Jones said. One is taking a second mortgage on a property in the investor’s home country and using that to buy euros and pay for the French property in cash, he said.
Foreign investors—particularly Americans—who purchase property in France can also benefit from currency diversification. “There’s a stable currency here, it’s not subject to great variations, of course it’s marched up steadily against the dollar, which is good and bad,” Jones said.
It can be difficult for buyers who are purchasing in dollars, but once they enter the euro market, their investment is not only stable, but continually increasing against the dollar, Jones said.
The biggest mistake American investors make is to carefully research and select a good investment property in France and then fail to act because they believe the dollar is too low, Jones said. “And, a year later, the dollar is even worse, and 18 months later, it’s even worse, and had they got in let’s say at a $1.20 in early 2006, every dollar that they put in at $1.20 would be worth $1.38 right now; every euro that they bought 18 months earlier would have gone up.”
“I have seen people kick themselves for not moving ahead,” Jones said. “The mistake is…in not taking action.”