The lowdown on leaseback

Sunday, January 01, 2012

The lowdown on leaseback

How and why have French leaseback schemes been a slow-burn success?

In the turbulent world of overseas property markets, French leaseback has been a solid, steady and relatively “safe” method of investing in a holiday home that earns an income. The French state-sponsored buy-to-let scheme has survived many peaks and troughs since it was set up around 30 years ago, and is now as popular as ever with both domestic and international buyers. So why has it thrived and is it still worth looking at?

Well, the Résidence de Tourisme model (or sale and leaseback; leaseback, for short) set out to kick-start the French construction and tourism industries by providing developers with funding for holiday-home complexes in popular tourism areas. These include beach-oriented areas in the south, Alpine areas and inland hotspots, such as golfing/leisure developments like the Center Parcs chain of resorts.

The investor gets the freehold ownership of a good-quality new-build apartment (usually furnished) and leases it back to the developer, receiving a guaranteed income for 9-11 years typically, after which the lease is renewable. The owner can opt for a number of weeks' personal usage, but that is reflected in yields, which work on a sliding scale with maximum income providing no owner occupancy.

But in addition to a hands-off steady income – and lack of upkeep hassles – the investor also gets a VAT tax break of 19.6 per cent, which is only repayable if they sell before the full (20-year) term of the lease. With banks more keen to lend on leasebacks than most things, and only a minimal deposit required, what's the catch? Well, it really suits the long-term buyer who doesn't want to use their property at whim, or for long periods of time, according to Francois Marchand, General Manager of Erna Low Property.

“The leaseback scheme has been a big success, as it works on a very sensible formula and is a secure way of investing,” says Marchand. “We have buyers who purchase as pure investment – for example, at a project we have near Cannes (prices from €135k), which offers 4.25 per cent yields with just one week usage per year – or those that want to use it for a few weeks a year. “We are also selling resales of leasebacks at the successful ski resort of Arc 1950, where new owners take on the balance of the lease (which dates from 2003-2007).

“An owner can opt out of the leaseback scheme, but then they have to refund the VAT on the remaining portion of the 20 years.”

Thus, leasebacks are really a 20-year investment for maximum benefit, and also you may well make higher yields from a standard buy-to-let property, though, of course, yields won't be guaranteed in the way leaseback income is. Equally, the leaseback scheme is only as good as the company managing it, so make sure you look at the track-record of parties involved, to be sure that income is truly “guaranteed”.

Location, as always, is crucial, according to Mary Hawkins of Leggett Immobilier. “Leaseback can be a disaster area if the apartment is in the wrong place or too expensive, so do your research to make sure it's at the right price,” says Mary. “It should also never be bought without seeing the site and determining if there's a strong demand for furnished rentals in that particular spot.”


A Place In The Sun