Euro-busters: Buying property in France
Don’t let the exchange rate put you off, says Georgina Caldwell, there’s never been a better time to invest in French property…
Credit crunch, the weak sterling, recession. In the last six months, all of these terms have been repeatedly bandied about and have no doubt dissuaded you from investing in anything, let alone property. However, while it might not seem to be the perfect time to buy in France, in fact, with interest rates at an all time low in both the Eurozone and the UK, a well-chosen investment purchase would generate a considerably greater return than any rate you could achieve with a savings account right now. And although bricks and mortar has received a bad rap in recent months, with the stock market flailing, property is still the most secure investment out there.
Currently, the weak sterling has made investment in France a less attractive prospect than it was this time last year. However, the euro, though strong, is not unbeatable and there are several ways to climb this particular mountain. Key to reaching the summit is to recognise that this is a marathon, not a sprint. If you’re looking to make money quickly, buying property in France is not for you but if you’re in it for the long-term, you could make a very handsome profit indeed.
And now, more than ever, it’s time to challenge the conventional methods of making a quick buck and instead look to more secure, long-term investments to provide for our futures. If there is one lesson to be learned from recent events, it’s that there’s only one criterion on which you should judge an investment’s worth, and that is whether it is safe. And you can’t get safer than France; for a secure, long-term investment, it’s the perfect choice.
Why? Firstly, France’s property market is both established and stable, consistently delivering a respectable, nay even impressive, rate of return, with none of the boom and bust’ speculation that the UK market suffers from. Secondly, it is heavily regulated, with property professionals, transactions and developers subject to stringent controls. And last, but certainly not least, France offers a myriad of opportunities for the real estate investor in the form of more than favourable tax breaks for French residents and non-residents alike, which more than compensate for any currency discrepancies.
Admittedly, France, which has always been thought of as too established and steady a market to be described as an investment hotspot, is not the most obvious choice for potential investors. Traditionally, people do not buy in France to turn a profit; usually it’s a love for the country, its culture, food and wine that is the primary factor in any purchasing decision.
However, the two are not mutually exclusive. You can buy a property for enjoyment and investment, or, if you are looking for pure investment, there are plenty of hands-off options too.
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Earn and enjoy
1) The waiting game: While for a long-term investment, currency fluctuations are less of a concern, the strength of the euro has put off many potential investors. However, sterling is widely expected to regroup in the near future and is predicted to reach levels of 1.25 against the euro in the next six months. At the same time, property prices are expected to drop further in France this year; the experts are predicting a 5-10% fall across France in 2009. If both of these forecasts prove accurate, by September, French property will actually be cheaper for us Brits than it was in the glory days of 2007, when the pound was strong and the French property market was at its peak.
2) Buy now, pay later: At the same time, mortgages are more readily available in France than in the UK; greater financial regulation has prevented French banks (and the consumers that borrow from them) from overstretching themselves. It’s possible to get a 90% loan-to-value (LTV) mortgage if you meet the French banks’ strict lending criteria, although an LTV of 70-80% is more typical.
If you are loath to buy with the euro at its peak, you could finance your purchase with a euro mortgage, thus minimising the amount of currency that you will need to transfer now and allowing you to transfer the remainder of the funds when the rate returns to sterling’s favour.
If you choose an interest-only mortgage with a high LTV and no early repayment penalties, you will only have to transfer a small amount of money in advance and make minimal monthly payments until the exchange rate improves. When it does, you will be able repay the loan in full without penalty at a more favourable rate, effectively reducing the price you pay for your French property. A good mortgage broker should be able to point you in the direction of a suitable product.
3) Transfer bid: Currency specialists offer a range of products that can minimise the risk involved in transferring currency overseas, at very competitive rates. Forward contracts, where the exchange rate is fixed for a set period, are a good idea for anyone who values certainty, while the risk-takers out there will appreciate the greater flexibility of un-hedged or protection option contracts, which respond to currency fluctuations in the market, for better or for worse, sometimes even guaranteeing a worst-case scenario’ or protection’ rate, allowing you to budget effectively, while still taking advantage of any movements in your favour.
4) Let it be: Letting out your property, whether to holidaymakers or for longer lets, is a great way to finance your second home. Most Brits who invest in a holiday home in France then let out the property to fellow Brits, often even accepting payment in sterling. However, the current economic situation has exposed a very real flaw in that plan; not only are sterling payments worth less when transferred back into the Eurozone – to service a mortgage, for example – but the weak sterling means that holidays in the Eurozone are less affordable and holiday homeowners who rely on the British market will inevitably see a drop in demand when times are tough.
If you target the French market, however, these problems evaporate; the French habitually holiday within France, especially when times are hard and, if you accept payments in euros, you won’t have to worry about exchanging currency to pay your bills in France and any profit will grow in value when transferred back to the UK.
Another considerable advantage of targeting the French market is that your holiday lettings business will not be at the mercy of flighty’ transport routes between the UK and France. For the French, holiday homes need to be easily accessible by road or rail, freeing holiday-homeowners from the tyranny of the low-cost airlines.
5) Leaseback: If managing holiday lets sounds like too much hard work, then a leaseback property might be the perfect solution for you. For non-French residents and French residents alike, the leaseback scheme can be an incredibly lucrative way to buy a property in France, in most cases, even allowing you to enjoy the property yourself while bringing in the readies.
The leaseback scheme was introduced by the French government to stimulate the provision of tourist accommodation throughout France; it allows investors to buy a freehold property (usually an apartment in a residence de tourisme) and then to lease it back’ to an approved management company for a fixed term, usually nine or 11 years. In return, the buyer pays no VAT (19.6% on new property) on the purchase price, and receives either annual rental income, a reduction in the purchase price (equivalent to rental income paid in advance), or even a share in the total profits. They also have use of the property for a set number of weeks per year.
The percentage return available will vary according to its location and each individual scheme, but should be in the region of 3-6%; investors can usually negotiate a certain number of weeks at the property each year in return for a reduced percentage return (on top of agreed weeks), alternatively they can waive their usage and enjoy a higher return on their investment.
Investors willing to take a punt could make considerably more if they opt to receive a share in profits. For example, MGM is estimating that Le Cristal Blanc development in Chamonix will pull in €1.3m gross profit in the first year, to be shared between the management company and 52 apartments, rising to €3.2m in the 10th year.
At the end of the lease, the owner can renew the agreement with the management company, opt out and retain full use of the property, or sell it, depending on the original agreement.
While a leaseback investment might be an easy option, with the management company shouldering the burden of letting out your property, it is essential that you research any potential purchase as thoroughly as you would were you to buy a property to let independently. You should be satisfied that there is a real demand for holiday accommodation in the area and that the management company and developer are reputable.
As Richard Deans of MGM (www.mgm-constructuer.com) explains: “In these uncertain times, the leaseback scheme is a great long-term investment with guaranteed annual rental returns, but it is vitally important that you select a reputable developer and management company. Demand is still high for leaseback properties within the ski resorts where construction is strictly controlled, so represents a great investment.”
Hannah Kestle of the Leaseback Owners Club (www.leasebackownersclub.com) attests: “The leaseback scheme remains a good option, and in most cases leaseback properties prove themselves to be comparatively safe and profitable long-term investments. However, buyers should always be aware of the potential pitfalls.
“The current economic conditions mean that tourism is suffering and, as a consequence, so are the management companies that the owners rely upon for their guaranteed rental payments. This means that it's more important than ever for buyers to consider the intrinsic value of the properties they are considering – are the properties located in an established holiday area or will the success of the development depend on an increase in visitor numbers? Will the development attract visitors throughout the year? And what about the other developments that the management company promotes – are they generally well-located and of high quality?”
1) SIPP: If you aren’t interested in using the property yourself, there are several options for the hands-off investor.
The first of these is the UK’s SIPP (self-invested personal pension). A SIPP is a pension plan that allows the holder greater freedom over what to invest in and for the plan to hold those investments directly, while still benefiting from the same tax advantages granted to traditional pension schemes. Although residential property is not eligible for purchase under a SIPP, you can invest in commercial property, so you could purchase a hotel room or self-catering apartment within a residence de tourisme, for example.
As Colin Dale of FDG International Property explains: “Hotel room property investments may be purchased within a pension/SIPP, directly or through a SIPP syndicate. They offer an interesting, and potentially more profitable alternative to an annuity purchase upon retirement.
“Hotel room property investment is a fully managed, hands off, high-yield, modest-risk asset class that is an ideal income drawdown investment. Hotel rooms are widely regarded as a superb turnkey investment product that require very little involvement from the investor.
“Revenues from buy-to-let hotel rooms are typically shared 40:60 or 50:50 by the investor and the management company/operator. As the room income is shared so equally, the hotel operator is well motivated to maximise room revenues, rental returns and occupancy rates and hence benefit the investor.
“As with any hotel investment, you should ensure that the development is fully operated and managed by established, branded hotel management company. There are generally no ongoing maintenance, refurbishment or furniture renewal costs for the investor as these are normally absorbed by the hotel management company under the terms of the lease.”
Unlike in the UK, the French buy-to-let market is far from saturated. In fact, the government has introduced incentive schemes aimed at encouraging French residents to invest in buy-to-let property. For non-French residents, however, there is another option, buying a property with a sitting tenant.
i) Sitting tenants: There are several advantages to buying tenanted property: first and foremost, you know that the property is rentable. This will help considerably with your mortgage application; banks love a sure thing. What’s more, you won’t have to go to the trouble of advertising the property to find a tenant and the tenant will come pre-vetted, with references.
However, the single biggest advantage of buying property with a tenant in situ, is the price. Typically property with a sitting tenant is 10-20% cheaper than its unoccupied equivalent.
ii) Loi Scellier: Available to French residents only and introduced at the start of this year in the 2009 budget, the newest of the government’s buy-to-let incentive schemes is the Loi Scellier, which will sit beside France’s other resident investment schemes, Robien and Borloo, before replacing them in 2010. Indeed, the dispositif Scellier is similar to the Robien/Borloo regimes, in that it is designed to increase the stock of available rental property, although it differs in the finer details.
In a nutshell, the Scellier scheme has two aims: to boost buy-to-let investment in areas of high rental demand and to boost sales of new-build property. In order to achieve this, the government is granting fiscal incentives to investors.
Investors who purchase a new-build property (previously unoccupied) in certain areas between 2009 and 2010, and then let it out for a minimum of nine years, will benefit from a tax refund equivalent up to 25% of the purchase price (capped at €300,000), spread over nine years, or €75,000 in total (€8,333 annually). For property purchased between 2011 and 2012, this figure equates to 20% of the purchase price or €60,000 (€6,660 per year). If the investor continues to let out the property after the initial required nine-year period, he or she will be entitled to a 2% tax refund per year for a further six years, bringing the total saving to 37%.
The rent is capped at a certain level and tenants cannot be related to the investor. The property must be situated in an area of high rental demand; this particular provision is in place to avoid some of the pitfalls of previous schemes, which saw new apartments built in areas of low rental demand. Specifically, these areas are those communes categorised as Zones A, B1 and B2 under the Arr�t� no185 du 11 ao�t 2006 relatif au classement des communes par zones (which is up for reclassification in the near future). See www.legifrance.gouv.fr for the full list.
The advantage of the Scellier regime is that it favours those on a lower tax band and is therefore ideal for first-time investors. The returns on relatively low-cost investments are still considerable. For example, someone taxed at a rate of 30% or less who invests €150,000 could save in the region of €37,500 over nine years. In contrast, the same investor would only save €18,000 over nine years under the Robien and Borloo schemes.
Potential investors should conduct their research carefully before parting with their cash. Most importantly, make sure that the property is eligible for the scheme. Check out the competition in the area and make sure that the property is correctly valued and likely to attract tenants. Is it close to amenities and handy for key transport routes, for example? Does the accommodation match up to similarly priced properties on the market?
There are numerous websites offering advice to potential investors and listing eligible investments. Cabinet Invest-Immo, for example, lists several properties throughout France, such as the Carr� des Pins development in Montpellier, with apartments starting at €130,000, or flats within the Les Alle�s Balguerie building in Bordeaux priced from €105,000. The company also offers a rental guarantee and property management services. (www.invest-immo.fr).
iii) Loi Robien: The Robien scheme is similar in scope to the dispositif Scellier, in that it is designed to deliver tax breaks to French-domiciled investors in buy-to-let property. The restrictions placed on investors are less onerous; crucially, investors can invest in new or resale property, anywhere in France, provided it is let as a permanent residence for a minimum period of nine years. Tenants can be related to the investor, but must not be a member of the investor’s household (foyer fiscal).
The Robien scheme was amended in 2006 and therefore is often referred to as the Robien-recentr�. The new amendments include a cap on the rent payable (10% below the market value), but the tax breaks on rental income can amount to up to 50%. For this reason, the Robien scheme is generally considered to be advantageous only for those taxed at a higher rate (30-40%).
iv) Borloo: The Borloo scheme is aimed at those who buy or build a new property in order to let it out over a nine-year period. Landlords receive a tax break to the tune of up to 65% on rental income, but rents are capped at 30% below the market value. Again, this scheme is recommended only to those taxed at a higher rate of 30-40%.
In summary, for the long-term investor, France offers a myriad of opportunities, all of which will deliver a superior return to a savings account in the current market and are attractive investments despite of the strong euro. So don’t delay, buy today!