What is French Leaseback?
A French leaseback or "Crédit Bail" is a long term, secure, low-risk property investment vehicle in which the developer of a property sells the freehold of the property to investors; the investor then leases back the use of the property to the developer or more commonly, a management company. Rent is then paid to the investor by the management company which in most cases is contractually guaranteed for the lease period. Typical leases are between 9 – 11 years with rental incomes between 3-5% per annum, which can be better than some savings accounts. Additional benefits include guaranteed rental income, tax breaks and the ability to use the property as a holiday home.
The leaseback system was introduced in France to improve tourism and the quality of tourist accommodation; the government wanted to reduce the number of vacant properties and so introduced tax incentives to increase construction, employment, tourism and investment in the country - It provides benefits to the tourism industry as well as the construction industry and individual investors. Another view is that it was introduced to encourage French people to secure their pensions in property, which is known to be a stable investment with long term growth.
French leaseback is not to be confused with regular Buy to Let investment, as there are considerably more financial and tax benefits backed by the French government.
What are the property types?
The properties are mostly located in "résidence de tourisme" (tourist residence) or "résidence avec services" (residences with services e.g. Hotels), making this investment type popular as a holiday location as well as providing rental income.
There are two main types of leaseback property: ZRR (Zone de revitalisation rurale) where the property is leased to the management company "murs nus" (without furniture) and they provide the furnishings, and "louer meublé" (rental furniture) where the investor purchases the furniture at the same time as the property and they let the property furnished.
What is the French mortgage market like?
Investment capital outlay can be low with French leaseback property; it can be bought with a minimal deposit due to the stable French mortgage market. By placing a small deposit investors are minimising risks, through currency rate fluctuations. The mortgage market in France has not suffered as badly as the UK or US market, because of tighter lending conditions and more suitable mortgage products on offer from the banks, so mortgage rates are better than some other countries. Some mortgages will be more suitable than others for French leasebacks.
Variable rate mortgages work differently in France than they do in other countries, if rates change the monthly repayment will not increase; instead, the mortgage term will extend, so the investor will have longer to repay the mortgage. This works particularly well for this type of investment because of fixed guaranteed rental income the investor receives will cover unchanging monthly repayments.
What about the economy in France?
France is politically and economically stable with low levels of private debt. The French economy suffered less severely than other European countries during the economic downturn and French bank losses were below other countries too.
The economy is largely centered on tourism with around 75 million foreign visitors a year making it the most visited country in the world and maintaining the third largest income in the world from tourism.
What are the Benefits to French leaseback?
The TVA (Taxe sur la Valeur Ajoutée) on the purchase of the property is rebated by the French government which makes it a desirable investment. Although this will only be applicable if the property is held by the investor for a period of 20 years, this is why the investment is a long term one. It is possible to sell the property before the 20 year period but the investor will be liable to repay the tax rebate equal to one twentieth of the VAT refunded for each year of ownership less than 20 years.
Guaranteed rental income:
The rental income is pre-arranged with the management company operating the property, at a set percentage return linked to the French construction index. The rental yield will be agreed for the term of the lease (9-11 years), throughout which it could increase but never decrease.
Hands free investment:
The management company in charge of renting out the property usually pays for the maintenance and upkeep, and also deals with rentals and marketing, making it a hands free investment.
The property will also enjoy capital growth by the end of the investment term; the French housing market has not suffered the same in the last few years, as the US and UK markets have and has managed to remain fairly stable.
Most leaseback investments offer investors a certain amount of free or discounted use of their property. This time is between 1 – 8 weeks a year. Usually the more time allocated to personal use the lower the rental yield and vice versa. Some investments don't have this option, this is more likely to be a city centre location or student residences, but the lack of personal use will mean a higher yield on the investment.
However, if this kind of investment is placed in a type of pension, such as a SIPP in the UK then the investor would not be allowed to use the property for personal use, in this event some management companies, such as hotel companies may provide other benefits such as discounted use in another hotel.
Are there any negative aspects?
That depends on the perception of the investor. As previously mentioned French leasebacks are a long term investment, they will not generate a return on investment in the short term. Typical leases are up to 11 years, although the property must be held for 20 years to benefit from VAT savings and 15 years to benefit from Capital Gains Tax savings. At the end of the primary lease term it is the aim of most investors to renew the lease contract for at least the same period so as to make these tax savings. Whilst some contracts are automatically renewed after the 9 – 11 year period, others may not be, making a thorough check of the lease contract important. The long term nature adds to the security of the investment, as well as being backed by the French Government.
Can the property be sold at any time?
It is possible to sell a French leaseback property at any point within the lease period. The buyer will need to take on the remainder of the lease with the management company and any tax break from the seller, so the original investor will not have to repay the VAT saved.
The benefits brought by investing in French leaseback property will not be fully achieved if the investor chooses to sell the property before the end of the 20 year period, otherwise VAT will need to be repaid and the investor will be liable for Capital Gains Tax if they hold the property for less than 15 years.
Due to the hands free, long term nature of French leasebacks many see this investment as an alternative pension, providing capital growth and a rental income with the added security of freehold ownership of the property. The increase in popularity of French leaseback property, due to the secure long term investment and guaranteed returns it presents, has fuelled demand for French property in key tourism locations.
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