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A guide to French Leaseback properties

What is a French Leaseback property?

The leaseback scheme was set up by the French government in 1986 to encourage investment into tourist destinations in France such as the French Alps, South of France and some major cities. The idea is to create quality properties in these regions that can be rented by tourists and keep the local economies strong. Because of this, the government offer buyers a number of incentives to attract this kind of investment.

 

French leaseback property benefits:
  • Freehold ownership of a property in a prime location
  • 20% VAT saving on the total price of the property
  • Hassle free ownership – management company take care of rental and maintenance
  • Property delivered fully furnished to a high standard
  • Investors receive index linked, guaranteed annual rental returns
  • Land tax exemptions for first 2 years from delivery of property
  • Reduced running costs
  • Income tax offset

These benefits make leaseback properties (also referred to as Tourism Residences) an attractive investment for both French and foreign buyers. The term leaseback is often misunderstood as leasehold properties, a structure which we are used to seeing in the UK. In France, all property is sold freehold and ‘leasehold’ does not exist. As its name suggests, a leaseback property is therefore a property owned freehold, which is leased back to a management company for a finite period of time.

 

Why does it work?

France is the most visited country in the world, with figures in 2014 stating that over 83 million tourists travel to France on an annual basis. The tourism industry in France contributes almost €80bn to the French GDP (over 9%), a number which is expected to rise to over €100bn by 2025 according to figures produced by the World Travel and Tourism Council.

These figures have been on a steady incline since towards the end of last century, at a time when international travel became easier and more affordable. The numbers are also compounded by the fact that many French residents take holidays in their own country, putting further strain on the need for quality tourist accommodation.

Therefore, by offering the various tax incentives to investors in leaseback properties, the government can ensure that accommodation in key tourist destinations is being used to its greatest potential, in return positively contributing to the country’s economy. All the while, the investors are benefitting from a secure investment, which is hassle free and tax efficient.

 

The leaseback property market

As with any property investment, location is key when purchasing a leaseback property. Successful leaseback developments are always located in prime locations within popular destinations such as the French Alps, the South of France and major French cities. At Erna Low Property we hand-pick the leaseback developments we market to ensure that our clients are always investing in popular locations, where tourism is rife.

It is a common misconception that the sale of a leaseback property is more difficult than a property without a lease attached. We have numerous partners in France whose business models are dedicated to the marketing and selling of leaseback properties and there will always be a market for leaseback properties in prime locations.

Another misconception of the leaseback scheme is that, when selling your property, you must repay the VAT back to the French government. This is simply not the case – the new owner will take on any VAT responsibility for the property.

 

Other things to consider when purchasing a leaseback property:

  • The developer – if buying new build, it is important that you are buying a property from a developer with a track record of building similar properties.
  • The management company – a leaseback property is only as successful as the company managing it. It is therefore of upmost importance that the buyer ensures that they are buying a property that is to be managed by a reputable management company with a strong network of tour operators and rental agents.

As before, at Erna Low Property we pride ourselves in working with only the best property developers, who are constructing properties to be managed by the finest managing companies in France. Any leaseback property that we sell is always then marketed for rent through our sister company Erna Low Travel, a mark of our confidence in the properties we sell.

 

Frequently asked questions about leaseback properties

Are there other costs to consider?

As mentioned previously, one of the key benefits of owning a leaseback property is that the running costs are largely reduced when compared to a standard purchase. The management company absorb many of the costs and the owner contributes a management fee, which differs per development. Other costs to consider; Taxe Fonciere (French land tax), which is on average €15 per m2 per year and is exempt for 2 years from the delivery of a new build leaseback property.

Is the rental return guaranteed?

Yes, the owner is contractually obliged to receive an index-linked amount of rent per year (often paid quarterly). The owner will receive this amount regardless of how much or how little the property is actually rented for.

More recently, we have seen a number of new developments being sold with leases which do not offer a guaranteed rental return. Instead, the owner is paid a percentage of the total amount of rent received by the management company for their specific property. In cases like this, the leases tend to be more flexible with regards to the usage that the owner has of their property and has the potential to be very profitable for investors who are comfortable with not having a guaranteed return. More details below.

Do I have to pay income tax in France?

A benefit of the leaseback scheme is the ability to off-set any income tax against a number of costs, which should ensure that the owner will not pay any income tax on the rent received for the entire term of the lease. France has a dual taxation avoidance agreement with the UK, along with many other countries, which ensures that if income tax is not being paid in France, it will not be paid if the funds are returned to the owner’s country of residence.

Can I get a mortgage on leaseback property?

Yes, you can finance the purchase of a leaseback property with a French mortgage, with Loan to Values generally up to 70% or 80%. Please contact us if you would like an introduction to our mortgage specialists.

What is the process of reserving a leaseback property?

The process is no different to reserving a standard freehold property in France, aside from a small number of extra documents to sign as part of the reservation contract (e.g. commercial lease contract). Read our guide to reserving a French property.

 

A new wave of leaseback properties

Recently, we have seen development companies and management companies promoting leaseback properties that take on a slightly different structure to the ‘traditional’ leaseback property. Owners benefit from many of the same incentives as detailed above, but the owner’s usage and rental works on a more flexible ‘buy-to-let’ basis. In this structure, the owner can use the property up to 6 months per year and are paid a large % of the actual rent receivedThere is no guaranteed return as with a ‘traditional’ leaseback property, but there is the potential for very good returns.

For any further information or advice on the leaseback scheme and the leaseback properties we have for sale, please contact our team of experts who will be happy to assist you.

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