French leaseback under review

Leaseback was introduced in France to boost investment. Now 20 years on the French government is reviewing the popular scheme, but it isn't necessarily the best investment for foreign property buyers, writes property journalist Laura Henderson.

The French are not known for buying properties, they prefer to leave their rundown buildings to the British to restore. But leaseback has attracted a large number of French property investors and more foreign buyers are wondering what it is all about.

It is over 20 years since the French government introduced its unique leaseback scheme aimed at boosting its tourism industry, creating employment and encouraging property investment.

It was a clever idea – refund the VAT to encourage people to buy new properties in popular tourist resorts and thus create a demand which would encourage developers to build more.

They became hugely popular and there are a large number of developments in popular locations like Paris, Alpine ski resorts, and the South of France.

Recently more foreigners have been buying into leaseback schemes. At first glance they are a very attractive option. Under the leaseback scheme, the buyer agrees to lease the property back to a holiday management company for year round rental. This is usually for a period of 20 years.

Who wouldn't be interested in a minimum of nine years guaranteed rental income, no personal involvement as everything is taken care of by a management company and an immediate discount in the form of a VAT refund from the French government.

But the problem is that it's a one-size fits-all scheme. Now that some of the first schemes are coming to end the owners are looking to sell them. Many French bought them as an alternative pension scheme. But they are not selling well, especially in the current climate.

New ones aren't selling well either. The guaranteed income is now half what it was say 10 years ago. Then you could get 5 to 6% guaranteed; now 3% is more likely. Yields are around 1% lower for owners who actually want to use their property which was one of the attractions in the first place.

The small print ties an owner down even further. Most leaseback contracts are for a standard 9 to 11 years initially, but under French commercial law the development/ management company is within its rights to automatically renew the lease. Many first time buyers who didn't check the small print have been caught out unawares, with leases being renewed without consultation.

Also vendors trying to sell their property before the end of their agreement have, not surprisingly, struggled to find a buyer. They are competing with a raft of new projects coming on line offering the nine-year guarantee, rather than what is remaining on their contract.

You need to be careful if you want to sell. Sell early and you'll have to pay back some or all of the VAT you saved at the start. Capital Gains Tax is also payable on any profit if you sell early before 16 years are up.

Also when buying a leaseback property you are buying into a holiday rental environment with regular changeovers, perhaps noisy neighbours, and a different day to day living scenario. Most don't give you any choice in terms of decoration and furniture.

In addition, the success of a leaseback development rests on two elements: its location and the long term performance of the rental management company.

Income from lettings in France must be declared to the French tax office even if you are a foreign owner. Read all the small print and you might find that your French leaseback is a lot more hassle than just buying a rundown house and renovating it like most Brits do.