The truth about French leaseback: Audrey Munsch sheds some light on the grey areas surrounding one of the safest property investment schemes available
The truth about French leaseback: Audrey Munsch sheds some light on the grey areas surrounding one of the safest property investment schemes available …
Much has been written about the French real estate product that is so popular right now with our Irish and British friends. A pre-packaged, fully managed investment scheme that has so far seduced – and rightly so – thousands of non-resident investors whose passion for France combines with a penchant for real estate. Recently a tiny proportion of botched operations have brought the product into disrepute, despite the fact that it is still highly competitive. Audrey Munsch, Director of Odalys Real Estate, puts matters straight.
Raphaël Sallerin: Tell us a little about ODALYS Real Estate.
Audrey Munsch : ODALYS Real Estate is a subsidiary of the ODALYS group. ODALYS Vacances is France’s number two specialist in tourism properties, handling over 250 residences in France and across the Mediterranean. In 2007 alone the group dealt with over one million customers, and saw a turnover of 114M€ (+ 12,8%). ODALYS can boast a strong level of capitalisation since joining forces with Financière Duval, which itself generated a turnover of 310 M€ in 2007, 70M€ of which was equity capital! ODALYS Real Estate concentrates on selling properties to French and foreign private investors.
R.S: Could you tell us a little about your own background?
A.M: I’ve been involved in this exciting business for nearly ten years now. My first job was with the company that really pioneered the concept; they were the first to realise that the specifics of French Leaseback were exactly what certain foreign investors were looking for. I spent nearly 4 years developing that market.
In 2002, I joined a national organisation and set about organising and commercialising Leaseback operators, working closely with specialists in the management of French patrimony. This experience helped me understand how to put together a product and also allowed me to perfect my knowledge of fiscal matters.
I finally joined the Odalys Group in 2007, and started re-thinking the Leaseback product and incorporating new sales methods. The concept hadn’t evolved in years and it was high time to start coming up with answers to the investors’ new expectations.
R.S: So what exactly is Leaseback?
A.M: Leaseback is a buy-to-rent investment offering certain tax incentives. It has nothing to do with time-share. To be precise, it means purchasing a furnished apartment in full ownership, which is then rented out and looked after by a management company for a minimum period of 9 years. In return the investor receives a guaranteed rental income and some very attractive tax incentives: reimbursement of VAT (19.6% of purchase price), tax-exempt rental for almost 20 years … It is the ideal complement to a retirement pension. Most of the properties are tourism residences, which means that the locations tend to be very attractive to boot!
R.S: Why is France so popular with foreign investors?
A.M: For lots of very attractive reasons! To start with, our country is the number one tourist destination in the world. Every year millions of visitors are utterly charmed by France, drawn by the diversity of our regions, our culinary art, architecture and history! There have been times when we’ve been embarrassed to find out that foreign clients are more familiar than we are with the treasures on offer throughout the country. Whatever an investor’s profile, there is always some kind of emotional angle to a project, even though it might not necessarily be uppermost in his mind.
“The French market is still very attractive; it remains much more accessible than a lot of the other European countries, and this has been true for many years”.
Recent research carried out by the ERA real estate network shows that Paris is cheaper than Luxembourg, London, Bern, Dublin and Madrid. Try buying a property in central London for 200,000 Euros; it just doesn’t exist. But in Paris you can still find a large studio or one bedroom apartment in a very pleasant neighbourhood, a three-bedroom apartment in the Alps or a very beautiful two-bedroom property in Saint Jean de Luz.
R.S: But it does seem that more and more investors are turning towards emerging countries. Does this represent serious competition for you?
A.M: It did, but not any longer. Two years ago, Bulgaria, Croatia and Cyprus were predicting exceptional results with some very convincing advertising campaigns.
The reality is different. Cyprus is an island that depends totally on air travel. The market for buying and reselling is almost exclusively British, which means it is a “virtual” market. A recession in the United Kingdom would undermine all transactions as well as affect prices.
Bulgaria, Croatia and Rumania are countries whose legal systems covering property purchase leave much to be desired. Plus their political and social situations are not conducive to a secure market.
As for Spain, many investors have been seduced by it, going back many years now. But recent financial scandals, notably on the Costa del Sol, have revealed that thousands of apartments were built without the necessary permits!
I am not saying that you can’t find great bargains in those countries, but the market is risky. And investors have understood that all too well.
Anyone looking to invest in a foreign country must first ask themselves how relevant the investment really is if buyers are uniquely non-resident. And any property developer who offers to pay for potential clients to fly over as an incentive to buy should be approached with extreme caution.
R.S: So according to you, France can still offer competitive investment opportunities?
A.M: Yes, absolutely, especially since French real estate is much less subject to price fluctuations than its European neighbours’.
France enjoys a highly competitive mid-term and long-term market, unlike the United Kingdom or Ireland, which have seen vertiginous price increases over very short periods of time, but which are also susceptible to sudden sharp drops in price. The French real estate market is distinguished by its stability.
Over the last 15 years, national averages have shown steady price increases of between 8 and 13% across all properties and regions.
Furthermore, French banks offer attractive financial packages to non-residents, securing their debt with a single mortgage loan. Today we are able to finance 80% of the purchase price (up to 100% in certain cases), over periods of up to 25 years.
We also enjoy a very safe legal system. Private ownership and consumer protection are extremely serious subjects in France. One of the most significant examples of this is the status of the Notary, who is a ministerial official in our country.
R.S: Do you think that these elements have contributed to the success of Leaseback?
A.M: Yes, Leaseback is the cherry on the cake in this context. Remember that this was initially a product designed for French citizens in a high tax bracket. And French buyers are still predominant, representing 80% of all sales. This package investment is also a very practical solution for clients. The property is entirely managed by the management company, who takes care of everything. When one doesn’t speak French fluently, and lives several thousand kilometres away, replacing a hot water boiler can soon become a nightmare.
Finally, the personal occupation options mean that investors can come on holiday whenever they wish.
R.S: Is that something you’ve been giving a lot of thought to at Odalys ?
A.M: Yes indeed. We’ve done a huge amount of work on that subject.
“We have come up with an “A LA CARTE” lease which offers the owner great flexibility.”
From now on owners can use their property for anything from one week to several months a year, even during high season. They can also change their dates every year. Part of the rental is guaranteed, with the remainder dependent on their personal use. With our 3* residence in Cabourg, for example, owners can enjoy their apartment for 4 weeks a year, whilst retaining a yield of almost 4% net.
R.S: Over the last 3 years we have seen a decrease in yield and an increase in interest rates …
A.M: For 2 to 3 years now land pressure has been more important than any increase in rental income. These days an unoccupied property in a good or very good location will generate a yield of between 3.9 and 4.55%, with a fixed interest rate of 4.75% over twenty years.
But our perception of figures is always very subjective. It’s true that in 2000 we were seeing higher yields - between 5 and 6% - but one tends to forget that the fixed interest rate back then was 6.20 % over twenty years ...
R.S: How do you feel about recent articles in the Irish and British press warning potential investors against Leaseback?
A.M: Quite positive, actually. Even if the botched operations were isolated incidents, obviously we hope that the press coverage will force the market to clean itself up a little, even if we consider some of the articles we read to have been very badly documented.
R.S: Who do you think is responsible for things going wrong?
A.M: There are a number of guilty parties! A few dishonest developers who had the idea of creating an “empty shell” management company, just to reassure their buyers.
Certain well established but small-scale management companies who were unable to honour their financial commitments. One has to understand that the management company is the keystone to Leaseback. It has to commit to a minimum of 9 years. And if the company isn’t rock-solid then a bad summer season or a winter without snow can put it in great difficulty. A group such as ODALYS (or one of its three major competitors) can survive disastrous occupation rates – due to a heat wave for example - because it can recoup from its huge portfolio of other real estate assets that don’t only function in July and August.
Then there have been a large number of so-called “specialist” agencies that have sprung up over the last 5 years. Some of these have been selling Leaseback without really understanding the product and as a result have misled their customers.
It is important though to put the phenomenon into perspective. Obviously we are conscious of the difficulties faced by certain investors, but an overwhelming majority of owners are extremely satisfied with their investment.
R.S: What advice would you give to investors who are currently thinking about Leaseback?
A.M: First and foremost, we are talking about real estate. The choice of location is paramount. This rule applies whatever the property, wherever in the world.
Since we are talking about Leaseback, it’s important that the residence be located in a region, a town, where there is a real demand for “tourism” rental. A customer who is offered a residence in the middle of nowhere with no tourist attractions whatsoever, but that claims a good yield, should run as fast as he can in the other direction!
“Once again, the choice of management company is extremely important ...”
… as is the choice of agent. If in doubt, I would suggest that prospective customers ask their agent to put them in touch with one of their previous investors, and to take a look at dedicated chat rooms.
R.S: One very grey area concerns the resale of these apartments, some of which are considered un-sellable!
A.M: That is just not true. Here again there is enormous confusion due to the fact that the commercial lease status is such an unknown area. A resale market does indeed exist and there are lots of different options.
From day one the purchaser is the sole owner of his property and he can choose to sell it at any time. Where the hypothesis changes depends on when exactly he wishes to sell.
At the moment we are dealing with the resale of numerous French and foreign properties, some of which are featured on our website. For example, we currently have on offer a 3 room villa in Port d’Albret in the Southern Landes at 80,000 Euros.
R.S: Yes, but the owner who chooses to resell has to reimburse the VAT to the tax authorities at a pro rata rate and also pay a penalty. Thus he loses a large chunk of his profit …
A.M: Only if he resells without the lease, which is not the only option, although people are often unaware of that.
In the case of a resale with lease to a new investor:
1- The VAT does not have to be reimbursed; this ruling was modified in 2004. In order to simplify things, credit of the remaining VAT is allotted to the property and not to the person.
2- The seller will not be liable to pay any eviction compensation.
The difficulty for non-resident owners is in knowing whom to ask. Local estate agents do not handle the resale of these apartments, which is a very specialised area. Sometimes owners will go back to the agent who originally sold them the property, but they are rarely in a position to deal with his demand.
We deal with approximately 10 requests per week from French or foreign ODALYS owners. Thanks to our position at the heart of such a large group, we are able to find a made-to-measure solution for each and every client, whether the resale comes before expiry of the lease, upon expiry, or at any point once the 9 year period is up.
R.S: What are you offering your customers at the moment?
A.M: As I already mentioned, we have a selection of resale properties located all over France. We have a very varied portfolio and I’d like to invite customers to consult us as the situation is constantly changing.
We also have a choice of brand new projects. We tend to offer quality rather than quantity as we adhere to very strict criteria. All projects are thoroughly audited and we only select those in which we ourselves would invest.
At the moment we have a 3* residence in Saint Jean de Luz, just 200m from the beach, with pool and tennis court. A nice 2-room apartment with terrace will cost you 156,000 Euros plus VAT.
There’s also a very nice 3* operation about to come up in Cabourg - the very chic and dynamic seaside resort in Lower Normandy - situated 150m from the beach, with covered pool. A one bedroom apartment is going for 117,000 Euros plus VAT, a two bedroom for 145,000 Euros plus VAT.
And of course we also have a variety of already existing properties, such as Le Buet in Haute Savoie, situated 100m from the ski lifts. Although the Morillon les Esserts ski resort is very popular, the prices are extremely competitive; a one bedroom apartment with balcony is priced at 103,000 Euros plus VAT. As of today we just have 3 apartments left.
R.S: Can your clients already benefit from the new “A LA CARTE” lease?
A.M: Yes, absolutely.
R.S: What would you say to customers who, despite ODALYS Vacances’ financial solidity, are still worried about unpaid rent?
A.M: I would tell them about the alternative we are offering which I’m sure they’ll find incredible! We are able to offer a system, which we have christened CASH-BACK, whereby we pay the whole 9 or 11 years rent in one go. By receiving the rental income in advance they can recuperate, when added to the Leaseback tax incentives, up to 30% of the purchase price.
What’s more, the choice of payment method is entirely up to them. The amount is either:
- delegated to the promoter and deducted from the price;
- or transferred to the investor’s bank account.
Both of these payment methods are obviously subject to contract.
This means that an apartment priced at 141,556 Euros will actually only cost 98,730 euros.
Finally, they get to enjoy anything from 8 weeks’ occupation a year, benefit from an exchange system featuring a selection of other residences from the ODALYS catalogue, plus receive additional rental revenue if they don’t use the whole of their occupation allowance.
R.S: Forgive me for saying so, but all that seems rather too good to be true … ?
A.M: Yes, I know. Let’s be clear, ODALYS have come up with this alternative as a way of restoring investor confidence whilst protecting their business assets. If there are fewer investors, there will be fewer new residences to manage! The blunders made by a few small management companies - even if these are minimal - have instilled a sense of distrust in certain clients.
R.S: Yes, but your customers might assume that this offer has been set off by a rise in prices!
A.M: They might indeed think that if CASH-BACK was the only purchase method on offer. But that’s not the case since each project is proposed with either the A LA CARTE lease or the CASH-BACK lease. The choice is up to the investor.
R.S: How do you see the future of Leaseback?
A.M: As a long and healthy one! Leaseback is above all a great tax incentive. It was conceived by the French government, who were anxious to increase the number of tourist residences able to house some of those 80 million visitors per annum. The tax incentive scheme allows the government to finance these projects with private money. Successive governments from all parties have never questioned this status, even when updating or revising finance laws. On the contrary, they have tended to improve it.
Furthermore, the market is going to clean itself up. After 15 years of existence, only recognisably legitimate organisations will survive. This will help to make propositions more transparent and more competitive.
Finally, it is up to us to allow the product develop in such a way as to meet the real expectations of investors, for whom the two main considerations are: more flexibility and better financial performance.
Which is why today I’m with the ODALYS group. It has the determination and the means - both human and financial - to achieve this. The success of our “A LA CARTE” and “CASH-BACK” solutions are a clear sign that we are on the right track.
Interview by Raphael Sallerin, Public Relations director for the Odalys Group - April 2008
Date added: 23-Apr-08