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Investing in a holiday home can be a costly affair. Serena Templeton looks into one pay-as-you-go alternative gaining a new fan base in France

It’s not difficult to be upbeat about the French property market at present. Our nearest neighbour remains a top choice for sophisticated lifestyle, culture and keenly priced property, with more Brits choosing to head there for their annual fix of Chablis by the pool and piste bashing in the Alps than anywhere else. Still, the most visited country in the world - a confluence of flat property prices and record-low rates for borrowers also means that it’s a great time to snap up a maison secondaire. One particular route to home ownership that’s enjoying a resurgence in popularity of late is leaseback.

It was back in the early 80s that the French government started to experience a surge in demand for privately owned holiday accommodation and introduced a law incentivising investors and developers to create more capacity. Today, the Residence de Tourisme or Leaseback scheme has a credible investor following, with a healthy tranche of British buyers opting to purchase a pied-a-terre this way. “The leaseback concept is simple,” explains property consultant Miles Edwards. “You purchase a freehold property in a development of your choice and lease it back to the resort rental management company for a minimum of 9 to 11 years, depending on the contract. You then have the option to sell up or to renew the lease to up to a maximum 20-year term. If you finance it right, you can cover a sizeable chunk, if not all, of your mortgage costs with the guaranteed rental income, (typically 3% to 5%), which is underwritten by the government. At the end of the lease period you’ve got a prime property in a high-value tourist location that’s yours to sell on the open market or, carry on enjoying.”

While individual schemes vary in how they operate, most offer up to 6 weeks personal usage per annum spread across the seasons. Rents are revised (by law) at least once every 3 years and are linked to the inflation rate. “Properties also come fully furnished,” adds Miles. “Maintenance and upkeep costs are already built into the rental rate – leaving you with just your initial purchase fees of 4-5% and annual taxe fonciere (land tax) to pay.”

“Leaseback property has the added sweetener of a 19.6% VAT rebate, either discounted from the purchase price or claimed back on completion of the development,” he adds. “Investors do however need to bear in mind that if they sell before their 20-year tenure is up, they have to pay back a percentage of the VAT. That said, you’ve got a fully-maintained bolt hole and no hidden extras to shell out on in the meantime.”

As with all investment schemes, caveats come into play: “The product is only as strong as the management company behind it,” stresses Miles. “Research your developer and make sure they have a solid track record and clearly laid out renewal and exit terms. It’s important to be realistic about capital yields too. Someone buying your apartment won’t have the leverage advantage they would when buying into a new project, so your re-sale price will have to reflect this. Every scheme has its pros and cons – the key is finding one that best suits your needs.”

Fast Facts - Leaseback

  • Leaseback schemes are often referred to as résidences de tourisme classées, designed for those seeking a holiday home for a few weeks each year, and are located in popular areas such as ski and coastal resorts, where self-catering accommodation is in particularly high demand.
  • Not be confused with timeshare, buyers own the freehold of the property and the full price is shown in the title deed. The purchaser of a leaseback investment will be required to sign a commercial lease agreement with a management company at the time of the signature of the deed of purchase (acte de vente).
  • Buyers of leaseback are entitled to a refund on the 20% VAT due on a property purchase in France. In most cases the developer will advance the 20% VAT for the buyer when the purchase completes which means the buyer doesn’t pay the VAT usually due making the purchase considerably cheaper. However, all property owners in France are required to pay taxe foncière so this is still payable by the buyer.
  • Owners are guaranteed a rental income from their property. This is usually 2-5% of the property’s value, adjusted annually for inflation according to rental indexes published by INSEE (National Institute of Statistics). The property is managed by a management company which takes care of the rental and general maintenance of the property.
  • Owners have restricted access to their property. The contract with the management company will stipulate how much use the owner gets but it is usually 2-6 weeks which are split over high, medium and low season.
  • The property must remain a leaseback for at least 20 years otherwise it is no longer exempt from VAT and the owner will have to pay the government 1/20th of the VAT that was due at the time of purchase for every year still left of the 20. If you decide to sell your property you must make sure the new owners are buying it as a leaseback otherwise you will be liable for the VAT rebate.

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