BuyinginFrance: Pure investment, holiday home, or a bit of both? Get your facts straight before buying a French leaseback property, says Niall McHenry

In recent times, France has emerged as one of the more popular markets for Irish investors seeking to invest abroad. While some have purchased villas and apartments to use on a regular basis as a secondary residence, the majority of Irish purchasers have bought leaseback properties or residences de tourisme.

Leasebacks can be bought as a pure investment or on a mixed-use basis (primarily an investment but with some personal use as a holiday home). These developments have been sold throughout France in areas such as the Côte d'Azur, the Alps, Provençe, the south-west, Brittany and Paris.

Most readers are already familiar with the mechanics of leasebacks but to summarise: while becoming the freehold owner of the property the purchaser (landlord) enters into a lease agreement with a management company (tenant) which takes charge of the property over a nine-to-11-year period.

The management company, which typically specialises in the provision of short-term furnished tourist accommodation and is probably operating similar schemes throughout France, is fully responsible for the day-to-day management of the building.

Normally the residence will be run to the equivalent standard of a three or four-star hotel providing a range of services such as reception, linen changing facilities, fitness centre, swimming pool, and breakfast.

The key benefits to the investor are:

they receive a guaranteed rental income for the duration of the lease somewhere in the range of 3-6 per cent (the less personal use, the higher the return). This income is normally adjusted at intervals in line with the cost of construction index in France.

the French government waives the VAT of 19.6 per cent which is normally applicable to newly built properties in France.

(It is important to note that the government foregoes this VAT on the basis that the property will be used as a residence de tourisme over a 20-year period. Should the owner decide to retain the property for personal use after the initial lease agreement, then there is a clawback of the VAT on a pro rata basis).

for those who choose the investment/personal use option, they have a holiday home abroad whose mortgage is largely financed by their rental income.

It is common for the management company to offer a number of weeks to the purchaser on a reduced return basis or alternatively these weeks can be purchased at a discount to the public tariff.

for those who opt for the pure investment option, they never have to visit the property. It is fully managed to include all repairs, maintenance and administration.

A typical leaseback property might return a rental yield of 5 per cent based on the net cost of the property (excluding the 19.6 per cent VAT and the acquisition costs which for new properties usually amounts to 4-5 per cent).

With these figures, most properties would be self-financing if the investor was prepared to put down approximately 30 per cent upfront.

So assuming the mortgage repayments are being met, what other outgoings does the investor have to consider?

As the owner of the property the landlord is responsible for (a) the payment of the taxe fonciere, which is an annual property tax (not payable in the first two years following completion of new developments) (b) their portion of the building insurance and (c) an administrative charge to cover the accounting of their rental income.

The landlord is also responsible for any structural repairs to the building during the duration of the lease.

However, all new developments have a 10-year structural guarantee (similar to our Homebond) which should cover most expenses with possible once-off exceptions such as major repairs to the swimming pool, in which case this cost would be shared by all owners.

If purchasing the property as a pure investment, the first thing to note is that a leaseback property which offers the highest rental yield is NOT necessarily the best investment.

Obviously, one needs to consider not only the rental income on offer but also the potential for capital appreciation. In my opinion the hallmarks of a good leaseback are as follows:

as with all property investments, location is key. It is important that a residence de tourisme is built in an established area where there is already an existing tourist base (i.e., the residence is easily accessible from nearby airports and benefits from its proximity to the sea, golf course, ski resort, mountains etcetera).

This will ensure existing and continued demand for tourist accommodation.

As obvious as this sounds, this is not always the case. I have visited some leaseback developments in the middle of nowhere, the hope being to promote tourism and attract visitors to an underdeveloped area by building the development. Not with my money!

planning restrictions are in place. If purchasing with purely investment in mind, it is important that the area will not be swamped with similar developments in the coming years reducing the possibility of making a good capital gain when the time comes for resale.

For the most part, planning in France is quite controlled. However, either a trip to the area or a visit to the local mairie (town hall) will give a good indication of the scope for further developments.

the management company is reputable and has a good record in handling these residences. While the leaseback scheme was initiated and is supported by the French government (to the extent that they return the VAT to the purchaser) it is the management company which provides the rental guarantee.

flexibility after the initial lease term. While the lease agreement is normally renewable at the end of the term, it is important that the owner has the flexibility to sell or retain the property for personal use should they so wish.

This is not always the case so it is well worth employing the services of a solicitor to review contracts prior to completion of the sale.

For the most part, the idea of living in a residence de tourisme on a long-term basis is not a practical one (they are smaller than your average apartment and being purpose-built to provide short-term accommodation, do not have much storage space).

I believe that France will continue to be favoured by the Irish investor over the next few years.

For those willing to take a long-term view, a carefully selected leaseback can provide the flexibility of holidaying in your chosen location, guaranteed rental income to meet your mortgage payments along with sound prospects for a good capital gain.

• Niall McHenry is the overseas manager of Gunne New Homes. He previously lived and worked in the south of France