Which French Leaseback should I choose?

Rachel — Fri, 09 Jul 2010 10:13:51 +0000

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Nowadays, if you want to finance your French leaseback property, it is better to select one which has a yield lower than 5%; otherwise, banks might decline your mortgage because they will be afraid that the management company of your leaseback will not fulfil all the financial requirements.
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However, buying conditions in France are currently excellent. The exchange rate is extremely favorable since Sterling reached a 19-month high against the euro at the end of June reaching €1.203. If you’re thinking about purchasing a leaseback property, you might be interested in one of our new programs in Argeles Sur Mer, a traditional small village located in the south of France on the Mediterranean coast, at the foot of the Pyrenees Mountains and the Spanish border. With its 7km of sandy beaches, long flower-bedecked and landscaped seaside promenade, Argeles draws in the crowds every year. Les Demeures de la Massane is a new residence offering apartments and villas with terraces and/or gardens. Purely Mediterranean in style, its architecture is a harmonious blend of wood, light coloured stone and ochre shades. The communal area comprises an aquatic centre with a swimming pool and a paddling pool, a spa with sauna, gym and a Jacuzzi, a games area for children and a bowling pitch.
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If you purchase a 1 bedroom apartment for 120k€ HT in this residence, you will receive an annual rental income of €4,560 HT with a yield of 3.80%. The rent will be paid by the management company, regardless of the actual occupancy of the premises.
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In order to obtain a mortgage for this leaseback, you can ask for an interest only mortgage with 100% LTV (Loan to Value Ratio). Accordingly, it will cover 100% of the purchase price of your property excluding VAT (the VAT is financed by the developer) but you will need to secure 30% of the total amount on a side investment such as on a life insurance contract or a bond. It is important to know that when you purchase a leaseback, you will need to fulfil financial obligations. Indeed there may be some shortfalls that mean that the capital required to fulfil these obligations may exceed the available capital. But there is no need to worry; with this kind of investment you are more likely to have a low shortfall.
If you want more information regarding investments options on this leaseback, we can send you a detailed leaseback simulation.
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In addition, as the rental income of your new property will be revised every three years in line with the reference rental index, there will be a clear capital appreciation after a few years. The rise in the value of your asset is also an important part of your investment.
To sum up, there are four major points that will allow you to develop the value of your asset:
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- The capital appreciation. This is part of the return on investment and must be considered as an investment goal from the beginning of the project. The property value of your investment will increase through the years due to price inflation.
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- The side investment interests. By securing 30% of the total amount required, you will not just be making a classic deposit as this side investment will add revenues to your asset, by generating interests. For example, with a secured amount of 36k€ HT on a life insurance contract for a purchase of 120k€ HT, you are able to obtain a yield of 4%. It will be a considerable capital received just from the interests of this side investment.
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- The rental appreciation. It should definitely be considered as the main part of the leaseback investment. Revised every three years, your rental income is likely to increase from a minimum of 1.5% to 2% maximum per annum. Consequently, shortfalls will certainly decrease every three years.
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- The diversification of your investments. These leaseback mortgages are a good way to generate additional revenues and are more rewarding years later if you are able to purchase another one in a different location. These assets will be a major security for your golden years.
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So if you are interested, do not hesitate to get professional advice, for example from Sextant Mortgages, in order to receive simulations for leaseback mortgages.

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French Leaseback properties: changes for 2010

Matthieu — Mon, 01 Feb 2010 16:19:45 +0000

Eligibility leases with rents that incorporate a minority variable rate.

Investments in tourist residences are based on a “triangular” theory:
DEVELOPER (D) – INVESTOR (I) – OPERATOR (O)

Put simply, “I” acquires a property from “D” and then signs a commercial lease with “O” who then pays the rent to “I”. Rent is at this point guaranteed, that is to say “fixed”. ie. A property worth €200,000 at a flat rate of 4% rent per annum will therefore be paying rent of €8,000 per annum.

In order to avoid pitfalls, some property managers felt it would be more realistic to use “sliding scales” (variable rates). This usage of variable rates would mean that, for example, managers could guarantee a flat rate of 2.5% over a 9-year period and then at the end of each year, they could pay back a percentage of the residence’s or manager’s turnover to the investors. In this case, there are elements of both “fixed” and “variable” rates.

BEFORE: This “mixed” rent incorporating the two types posed taxation problems in leasebacks located in the ZRR, Zone de Revitalisation Rurale or “countryside under re-development”. The tax would depend on each tax office’s interpretation of the make-up of fixed incomes, so the investor would lose his tax advantage.

NOW: It is no longer an issue as the line is “if the income is erring on the side of fixed rates, then there is no need for independent interpretation.” It means that the tax deduction will not be affected any more within the ZRR.

Changes to commercial lease systems for 2010.
Up until the end of 2009, in the event that the management company could not fulfil its contractual obligations, property investors were required by law to sign a commercial lease with a new management company otherwise they would lose their tax advantages such as the VAT rebate on New Build properties . Now, with the law changes made for 2010, potential investors can avoid tying themselves to a new precarious lease with another management company. Investors can avoid the commercial lease altogether and grant a management mandate to a professional manager. For example, an experienced manager specialising in hotel management or in holiday centres, or if the owners decide to run the whole operation themselves without the involvement of middle-men (although it might be very complicated to do so due to the number of owners in those types of residences who usually have 100 apartments).

There are 2 conditions to this new law:
1) The so-called “self-management” of the residency must involve at least 50% of it.
2) The “self-management” of the residence is possible after 1 year only if the owners could not agree on another management company. In practice, this period of 12 months isn’t ideal for residences in difficulties, “It would be necessary to allow investors, who are already without rent, to find a solution to their money woes more quickly,” according to Yannick Aure, the Head of Exhore, (Exploitation d’Hotels et de Résidences).

Yannick, himself a specialist in hotel management, has proposed a management mandate to investors who agree a re-sale price of the lease for a token sum will receive the commercial funds of their property in line with a judicial proxy.

At Sextant Properties, we hand-pick the French leaseback developments, making sure that the management companies are sound and will be able to fulfil the rental contracts they sign with the buyers.

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Which French Leaseback should I choose?

French Leaseback properties: changes for 2010