The pros and cons of leasebacks
At a time of uncertainty, a scheme that enables you to buy a holiday home with a close-to 20% saving on the asking price, and meaningful rent guarantees thrown in, looks extremely attractive on the surface. But is a leaseback really a good way to buy in the French property market? - Apr '09.
Leasebacks, for the uninitiated, were introduced at some time during the 1970s or 1980s, as a government-backed initiative to encourage the supply of tourist accommodation. When he came to power in 2007, Nicolas Sarkozy, the French president, was quick to express his desire to extend the scheme.
The basic concept is that you buy a property - typically a holiday or ski apartment - and lease it back to a management company for a fixed period, normally nine or 10 years, which then lets it to tourists. To qualify for tax incentives, the property receives official accreditation as a residence de tourisme. If it qualifies, then the 16.4% VAT you usually have to pay on a new-build property (19.6% of the gross asking price) is refunded to you once the leaseback arrangement has been signed, and if you keep the property for 20 years, the VAT is waived forever.
The advantages are as outlined above: an effective discount on the purchase price, plus a rental guarantee that forms part of the lease contract. (You are usually able to use the property yourself for a few weeks each year, in return for a lower rental return.)
On the minus side, guaranteed rentals are somewhat lower than they were a few years ago, at around 3% to 4%, and are unlikely to cover your mortgage costs. So as Martin Sadler of Assetz France recently put it: "Leaseback is still popular but now appeals more to the lifestyle purchaser than to the pure investor." Other pitfalls to look out for: if you sell early or the management company goes bust, you will be required to repay a proportion of the VAT; and there's always the danger that everyone tries to sell their property at the same time at the end of the 20 year period.
They can also be inflexible; Assetz has created its own leaseback scheme to address that. Whether leasebacks become more popular as a result of the recession has yet to be seen; what's clear is that they will appeal more to those looking for long-term, relatively low-risk property ownership, and require limited use of the property for themselves.
