Assetz® News - Comparing Guaranteed Rental Schemes on Property Investment in France and Spain

Comparing Guaranteed Rental Schemes on Property Investment in France and Spain

9th May 2005 |

French leaseback schemes are not very flexible but offer great long-term investment opportunities. Spanish schemes are more suited to holiday home owners, but there are few long term guarantees.

Guaranteed rental schemes on overseas property can be foolproof investments, offering a cast-iron rental income for an agreed number of years with a minimal amount of bother. But investors should look beyond the headline rental income offered per year, warns property investment specialist Assetz ().

The French Leaseback scheme can be particularly good for long term investors, but can also be inflexible – many schemes suit people whose primary objective is to own a holiday home to use for a few weeks a year and to have the mortgage subsidised, and all the hassle taken care of by a professional management company when they are not there. However many other schemes have no personal use allowed and are pure investments, or taking personal use reduces the rental income too greatly to be attractive.

Introduced by the French Government twenty years ago, French Leaseback seeks to generate tourism by increasing the quantity of good holiday accommodation in locations such as the Cote D’Azur, the Alps and Paris. It enables investors to purchase a freehold property, which they then lease back to a pre-selected property management company, earning a guaranteed rental income for at least 9 years. There are also schemes that specialise in corporate lets rather than holiday lettings and these often produce higher rental incomes. However, the flexibility of a given scheme is the key issue for many investors who like the scheme and want to have some use of the property. Stuart Law, Managing Director of Assetz explains,

“French leaseback ties investors in for a minimum of nine years, but realistically 20 years should be assumed when buying, during which time they are likely to get no use from the property if they want to achieve yields of 5–6%, otherwise expect yields of 3-4% if you want some use of the property. Although the number of weeks owners want to take personally per year can usually be chosen at the start of the contract, this can not then be easily renegotiated for the rest of the initial 9 years term. Also, if an investor wants to sell their property before the lease is finished, the buyer would be obliged to see through the rest of the contract.”

Another thing to watch for generally in leaseback schemes is the quality of the management company – rentals are guaranteed by this company and not the government so ensuring that the rental company is sound is very important for a hassle-free future – this leaseback scheme ‘quality filter’ is a unique service provided by Assetz International rather than them just selling all the schemes available as most agents do.

On the plus side, investors who are comfortable with a long-term investment commitment will benefit from a 16.4% discount on the property price, since the French Government provides a VAT cash back upon completion. Also, while the property is being leased back to the management company, they are responsible for its maintenance, leaving owners with minimal annual costs and involvement.

Investing in a French leaseback can be financially rewarding – for instance if a 20% deposit was put down on a property giving a 5.5% annual return the mortgage would be fully paid off in about 20 years and this would give the investor an annual rate of return of over 9% compound growth per year on their deposit even if property prices were static for the 20 years – total returns of 15% plus are possible if property went up 7% per year for the 20 years. This is clearly very attractive in world of low interest rates and poor stock market returns.

Some buyers are beginning to see other opportunities in Leaseback schemes – by combining retirement equity release and the leaseback schemes some older buyers are seeing the opportunity to get 10% plus income on capital in a fairly safe way and avoid inheritance tax by releasing equity from their own home to help a child put down a 50% deposit on the leaseback property. The son or daughter then pays the balance of the mortgage off as a savings scheme and maybe gets some use of the property and owns the property outright in perhaps 10 years and the parents get the 5% income from the rental which is actually 10% return on their deposit.

Spanish guaranteed rental schemes are generally considerably more flexible, making it a better choice for investors looking for a flexible holiday home with lots of use first and foremost, rather than a long-term investment with fixed income.

Stuart Law comments: ”The Spanish guaranteed rental schemes that we are seeing coming onto the market, and indeed in some other countries too, allow owners to use the property whenever it is available but only provides investors with one to three years rental income guaranteed. They do however usually provide a minimum level of rent guarantee which is not capped and in fact can often be bettered if the property rents well – the opposite of the French scheme which offers a fixed rental income regardless of how well the property lets.

In addition the Spanish schemes we are seeing often have close ties with the developer one way or another so the company giving the rent guarantee may well have received a subsidy from the developer and this would be built into the purchase price of the property. Spanish schemes should be seen as a safe way of getting started on rental income from your property but they are not necessarily long term solutions. The one exception is the new Pierre et Vacances schemes that now operate in Spain as well as their French homeland. Unfortunately these leaseback schemes in Spain are capped rental income at very low rates, typically 3% and do not offer any use at these rates, or very limited use at much lower income levels of 2%.

“In today’s busy world both of these managed schemes can be a very sensible way for people to get involved in overseas property ownership and rental without quitting their jobs but investors should always consider the extent of their commitment by dealing with a highly experienced Leaseback advisor like Assetz International before signing on the dotted line.”

This is a press release by Assetz also available at http://press.assetz.co.uk/articles/1868.html. Alternatively, please see our full press release archive.