The French Tourist Property Leaseback Scheme

The French government introduced a property leaseback scheme (rental guarantee scheme) many years ago to boost tourism and the holiday rental market - and they have recently made a number of changes to improve it. The rules are strict and it is, therefore, important to understand how it works and what the constraints are: All developers building leaseback properties have to register the development as being leaseback which means it is generally not possible for clients to purchase the properties for their own use exclusively as this would breach the terms of the building licence. Usually the owners of a leaseback property will have the ability to spend some time using it themselves but this will be limited.

The Basic Principals
The purchaser owns the freehold but is required to enter into a lease with the developer or a management company to rent out the property;

• The lease term will be a minimum of 9 years and can be for 11 years and will specify the return the owner can expect. This return will invariably be guaranteed – whether or not the property rents out the owner will receive the guaranteed yield. It should also be index-linked;

•  At the end of the lease term the freeholder has the option to take possession personally, rent out the property privately or renew the lease with the management company;

• Within 3-6 months of purchase the freeholder can reclaim the 19% VAT paid on the purchase price at completion;

• Frequently owners on a leaseback development will be able to rent rooms or apartments for their own use at discounted rates if they wish to spend more time at the development than their lease terms provide for own use;

• Most leaseback developments are specifically designed for tourist accommodation and will, therefore, include bars, restaurants, spas and the like.

As can be seen, these are ideal investment properties but not ideal for those seeking to spend significant amounts of time in France. The resale value will also be affected by the remaining term of the lease (you can sell the freehold at any time but if the sale occurs within the period of the lease the property will have to be sold with that lease in place still). In general, the longer the period still remaining on the lease the more the value will be determined by the rental yield and the closer the lease is to expiry the more the property will be valued on a vacant use basis. Having said that, on good quality developments with plenty of on-site facilities the value of the property should be underpinned somewhat better in times of slower property price inflation or when prices fall back.

Recent Changes to the French Leaseback scheme

The French property leaseback scheme has been a staple of the property investor's basket for a long time. The basic formula is simple - you buy a property (generally newly built) and lease it back to an approved management company. A guaranteed income stream thereby enables the property owner to budget accurately as he/she will receive regular fixed rentals throughout the term of the leaseback (typically 9 to 20 years). The rentals receivable during the peak summer months tend to be lower than achievable on the open market but, in compensation, the owner of the property can rely upon rent payments during the otherwise slower periods of winter and autumn.

 
Complicated VAT exemption rules abolished
It has always been a feature of these schemes that the VAT due on the purchase of the property - up to 19.6% - was not payable unless the freehold was sold on within the term of the leaseback agreement. There was a sliding scale for VAT due depending on how early the freehold was sold (e.g. if sold after 9 years the VAT payable would be 11/20 of the total representing the 11 years of the 20-year term still to run).

No VAT now
A new law which came into force last year now means that no VAT has to be repaid no matter how soon into the term of the leaseback you sell the freehold. Although this only currently applies in respect of new-build properties it is bound to encourage more interest in the French real estate market from investors.

Read more about owning or buying a property for sale in France from Overseas Property Centres.

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