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 Why purchase a buy-to-let in France?
Following the success of the buy-to-let as an investment idea in Britain, many people have begun to investigate the possibility of similar investments overseas, particularly since worries about the level of house prices in the UK have begun to emerge.
France is the first choice for many because property prices are much cheaper than in the UK and indeed, than in many other European countries, a fact confirmed by the Economist magazine in their recent survey of global house prices (see below).
Some people want to purchase a property in France which can be let out most of the time, but available for themselves as a holiday home for two or three weeks a year. We call this a
seasonal let. Others are looking for a long-term investment in property that will give a total return superior to that available from financial investments. This normally means letting the property unfurnished to a local person for use as a home. We call this a
permanent let, similar to a buy-to-let in Britain. We show you below that this type of investment offers a steady return that is much better than many financial investments,
even if capital gains are excluded.
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What return can I achieve from investing in French property?
The rate of return on both seasonal and permanent lets varies between 4%-10% per annum gross depending on the location and the costs involved to keep them let. For example, properties in the prestigious high ski resorts like Courchevel and Val'd'Isère can command high rents and thus yield 10% gross with only 12 weeks let of an 18 week season. But the costs charged by the agents who let the apartment and handle the change-overs can be 20-25% and this reduces the yield to 7% gross. However, using a mortgage, this return can be boosted to 12 -15% p.a., excluding capital gains.
Estimates of yields for permanent lets are given for each property on our
site.
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Prospects for the French residential property market
A survey of global house prices commissioned in April 2002 by the Economist magazine shows that French prices over the last 21 years have grown by less than the world median, and by a lot less than many other European countries (chart
1) and also have experienced less volatility (chart 2). Chart 3 shows that
house prices in France have now begun to accelerate at a faster rate, reaching
14.5% p.a. in Q2 2004.
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Chart 1
Charts
courtesy: The Economist |
Chart 2
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Chart 3
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At the same time, the French economy is expanding the fastest of any of the
large EU nations, while recent large tax cuts and low interest rates have
increased their purchasing power. Thus while house prices in France have
traditionally grown by less than those in the UK it is understandable from these
figures that the French themselves expect their house prices to continue rising
both in 2005 and beyond. Moreover, there is an acute shortage of rental
properties in both Paris and southern France, which has caused parallel
increases in the level of rentals.
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The Magic of Leverage
But the annual return on your property and future capital gain is not the whole story; there is also another factor to consider…what we call the "magic of leverage".
Not all purchasers are directly conscious of the benefits of purchasing their rental properties using leverage (i.e.
a mortgage) and then using the stream of rentals they generate to pay off the debt contracted to buy it. The Economist sums this up as follows (magazine of 31 August 2002):
"Unlike most equity investment, most homes are paid for by borrowing; interest payments may offset the rent. But the use of leverage can also greatly boost the return on your initial stake. Suppose you invest $20,000 in shares, which after five years are worth $40,000, including reinvested dividends. That implies an average annual return of 15%. Alternatively you could use the $20,000 as a deposit on a $100,000 house, which then rises by 7% per year over five years, to $140,000. Assume for the sake of simplicity that mortgage interest payments and maintenance costs exactly offset the rental income…Then comparing the total capital gain of $40,000 with the initial stake of $20,000 gives an annual return of almost 25%".
We can easily separate out the capital gains effect, and look at the returns available simply from using leverage, or borrowing.
Using figures typical of a French buy-to-let, if you put down, say, 30% on a property, let it at 5% and use the rent to pay off the debt over 20 years at a rate of 3.6%, your 30% investment has multiplied 5 times.
Put another way, this represents almost 12% p.a. on your initial investment, even if there has been no capital appreciation on the property during the 20
years.
If you then add in any likely capital appreciation, a buy-to-let becomes a very attractive investment indeed, provided that interest rates remain low and the property remains let.
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A huge tenant pool, and low-cost finance as well
The French market for permanent lets can present solutions to both of these risks. First, French banks offer rates of interest which are fixed throughout the term; as we write
(February 2005) borrowers can obtain 20 year finance at 4.25% or 3.4% variable. Second, the French buy-to-let market offers one of the largest tenant pools in Europe. Approximately 25% of the French housing stock, around 5 million households, is privately owned but rented out i.e. literally buy-to-let. This compares with around
400,000 units in UK. Finally, the basic unfurnished residential lease in France is 3 years renewable, so that in practice tenants stay put for much longer than in Britain.
Thus, provided you purchase in a place where the French want to live, you can be reasonably sure that you will not experience voids to the same extent as you might in the UK, and you will enjoy a rate of return which any other form of investment would find difficult to match.
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Legal aspects of renting out a property in France
The legalities applicable to the rental of a property in France will depend upon the type of property, who the tenant is and whether the property is rented furnished or unfurnished. In certain cases, the rental agreement will be regulated. Some guidelines are given below to provide some basic information.
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Short term holiday lets: these may be for short periods e.g. week or a fortnight (maybe longer) during seasonal periods. There is no particular form for the rental agreement but for the protection of all parties, it should be in writing and specify the following, amongst other points: property rented, price and payment, rental period, termination, situation in the event of damage. |
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Furnished property: property that is furnished can be rented out for any period and does not come within the more stringent unfurnished rental legislation. The rental agreement does not need to be in writing but, again, it is safest for all if it is. It should specify, as a minimum, the main terms of the rental agreement as mentioned above for short term lets. |
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Unfurnished property: if the property is rented to an individual then the minimum rental period is three years (to a company it is six years) when the property is rented as a principal residence. Such rental agreements are regulated and a brief summary of some of the main areas is given below. |
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Form of the agreement: must be in writing
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Notice: can only be given if the landlord wishes to recover the property for himself or his family, to sell it or otherwise for an important and legitimate reason. Six months notice must be given.
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Renewal: if notice is not given or if no clause is specified in relation to renewal, the tenancy will automatically renew under the same conditions and for the same period.
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Rental amount: in principle, it is freely fixed between the parties. The parties can agree upon review of this amount but their contractual liberty is subject to certain restrictions to prevent exorbitant rent increases.
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General points: |
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A tenant may be expelled for non-payment of rent; the process takes around three months. However, a tenant cannot be expelled from a property during the winter months (1st November to 15th March).
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Tenants hold a right of pre-emption over property used as a dwelling or for mixed dwelling and professional use. This means that in the event of a sale of the property, they must be notified of the sale and have a period of two months in which to decide whether to purchase or not. For this reason, it is usual to buy a buy to let property without a tenant in situ.
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Please note that the above is not intended to constitute legal advice; please contact your legal adviser for advice relating to a specific case.
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Taxation aspects
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Income Tax:
Rental income is taxable in France after deducting a wide range of expenses including normal running costs, repairs and maintenance, refurbishment and restoration (but not rebuilding or enlargement), management and service charges, insurance, interest on loans in France and local property taxes - or often a fixed percentage in place of actual expenses.
If the gross income from unfurnished lettings does not exceed €15,000 per year, the taxable figure can be calculated simply by the deducting a flat 40% of rents in place of actual expenses. Above that, or by choice (say to recognise a lower profit or a loss), the normal regime applies and in addition to the expenses above there is a 14% deduction for depreciation. There are other reliefs for certain government-recognised lettings.
Furnished lettings are taxed in a similar way to other commercial activities carried out by individuals. Where rents do not exceed €76,300 per year, the
'Micro-BIC' regime allows a flat deduction of 70% of rents in place of actual expenses. Otherwise, one of the 'real' regimes would apply which can allow a lower profit or a loss to be recognised, but does require full accounts and a separate tax declaration. Under the 'real' regimes a 20% deduction from net profits can be obtained if accounts are monitored by a government 'Management Centre'.
The taxable figure is subject to French income tax at normal scale rates, which range between approximately 7% and 50%, but subject to a minimum 25% for non-residents. Residents of France will also pay 10% social charges and 8% healthcare
(CMU) charges on this income.
A UK resident will also be subject to UK income tax on the net income
calculated under UK rules - with credit for any French tax paid. For UK purposes, it is often possible to obtain a deduction for reasonable costs of visiting a property in addition to the other
expenses.
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SCI:
Holding rented property via an SCI or other company will generally cause any furnished lettings income to be taxable at French corporation tax rates of 33.3% (plus possible surcharges) rather than personal income tax rates. In addition, the personal regime for capital gains tax purposes will not apply. This leads to a higher taxable gain being calculated, although there is a capital gains tax exemption where the annual rents in an SCI are below €152,300.
Also, a UK-resident can be subject to a UK income tax charge on the value of any rent-free occupation of a property held in an SCI (or other company) of which he is a shareholder.
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Capital Taxes:
Under the personal capital gains tax regime, there are allowances for costs, improvements and inflation as well as a 'taper relief' that reduces the gain by
10% for every year of ownership over 5 years, and a general exemption of €915. There is also a special relief available to residents and non-residents for the first
sale of a 'holiday home' in France.
Gains are added to income for taxation purposes. However, non-residents are taxed on gains at a flat
16% - which is withheld by the
Notaire handling the sale.
If a non-resident trades in real estate the withholding tax on gains is a non-refundable 50%.
Wealth tax applies in France to the value of French property held by a non-resident, and on the world-wide assets of a resident of France, over a threshold. However, in the right circumstances rented property can be exempt.
Succession tax on inheritances or gifts is also something that needs to be considered and planned for. There is no blanket tax exemption for property passing between husband and wife as there is in the UK, and in many instances even the right to freely pass on property to your spouse can be restricted if you have children. (see legal aspects above)
In addition to the mainstream taxes there are various local taxes that also apply.
The foregoing is only a very brief guide to the taxation implications of owning and letting
property in France. It is no substitute for expert professional advice which must always be taken in order to protect your
interests.
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General points of interest:
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The costs of purchasing a new build property are far lower than those for a property more than five years old. There is no agent to pay (saving
5 - 10%) and notaries' fees are lower (saving 3%) Also, many long-term tenants prefer to rent a new property. So it may well be worth considering this from of purchase for a buy-to-let. We have many such properties available on the website.
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Insurance against non-payment of rent is widely available in France, and costs around 3% of rental amount.
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Because of legal complexities, it is not usual to purchase a buy-to-let property with a tenant in situ, other than at an important discount.
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