A flat in the French Alps shouldn't be a mountain to climb
Leaseback schemes make the process straightforward and can bring a decent return on investment. Julian Knight and Chiara Cavaglieri report
Sunday 06 February 2011
For many British property buyers, the French Alps have just about everything – breathtaking views, clear air, warm summer months with lots of activities, with close proximity to the glorious Côte d'Azur and, of course, French cuisine.
But it's when the snow falls that the Alps really come into their own with some of the best winter sports in the world. It's no surprise, therefore, that in these uncertain times, second-home buyers are focusing on the classic appeal of the Alps.
"The Alps has the biggest skiable area in the world and, when combined with French charm, food and efficiency, it's a formula that's hard to compete with," says Nick Leach, a director of giant French property and holiday company Pierre & Vacances (P&V).
Leaseback schemes offered by the likes of P&V, Erna Low Property and MGM Properties make purchasing property in the French Alps a relatively straightforward process. From an investment point of view, there are considerable tax breaks, a guaranteed rental return and low-cost mortgages up for grabs.
The latest development from P&V is in Flaine Montsoleil, one of five inter-connected resorts that make up the Grand Massif ski domain in the Alps. The new-build residence Terrasses d'Hélios is due for completion towards the end of 2012 with prices for one-bedroom chalets starting at €270,000 and reaching €650,000 for four-bedroom apartments. The rental is managed by the developer and investors are guaranteed annual returns of up to 3.5 per cent.
Under a leaseback arrangement, you purchase a freehold property which you then lease back to the developer in exchange for a guaranteed rental income, calculated as a percentage of the purchase price and index-linked to rise with inflation. Contracts are a minimum of nine years with the management company taking care of all the running costs, including repairs and maintenance.
"Leaseback offers hassle-free ownership where a management company maintains and markets your apartment for you, ensuring rental income as well as personal use – with the peace of mind that someone else can deal with the day-to-day running of the property," says Alice Weston-Baker from Erna Low.
As the freehold owner you can sell whenever you like, but the property would be sold on with whatever period was remaining on the lease. Otherwise, you can negotiate a new leaseback deal once you've reached the end of the initial contract period, or you may choose to use or let the property yourself.
The big sweetener is that VAT of 19.6 per cent on new-build French property is refunded for leaseback investors. One cost that is unavoidable, however, is the taxe foncière of between €10 and €30 per square metre which all buyers must pay for local council services.
If you plan to use your Alpine apartment as a holiday home as well, you can use the property for a set number of weeks every year but be prepared for a smaller net return. With P&V's new development in Flaine, for example, staying for one week in peak winter season and another in summer would shrink the annual returns to 3.1 per cent. If you wanted to stay for eight weeks per year, the return could fall to 2.6 per cent.
If buying new-build property doesn't appeal, you might get a better purchase price on an existing property, even without the VAT saving.
"If you are looking for a pad in the Alps on a classic freehold basis with no restriction on usage, you can't beat a studio apartment in Brides-les-Bains, linking to the renowned Three Valleys ski area, from €85,000 including VAT," says Ms Weston-Baker.
Those looking for a touch of class without wanting to go down the leasehold route could look at Les Chardons Argentés in Samoëns's luxury new-build apartments starting at €251,000 developed by MGM, a firm with a long track record of Alpine development.
This flexibility comes at a price, however, as you will then have to cover maintenance fees yourself. It might prove more difficult to secure a mortgage without the backing of a leaseback arrangement.
"Leaseback schemes can vary but you may be able to get away with only a 5 or 10 per cent deposit, whereas across the board in France you would need a 20 per cent deposit," says Miranda John of Savills Private Finance.
John Busby, a director of French mortgage specialist Athena Mortgages, says that for 80 per cent loan-to-value (LTV), current variable rates start at 2.8 per cent for a 25-year term, while fixed rates start at 4.25 per cent for a similar term length. At 90 per cent LTV, Athena has 25-year mortgages from 4.45 per cent and at 100 per cent LTV, 30-year capped products starting at 3.8 per cent and capped at 4.8 per cent for the duration of the mortgage term.
French lenders base their decisions on affordability, so you might not be able to raise as much money as you hoped. "Borrowers need to be aware that monthly loan payments, including mortgage payments, cannot exceed more than a third of their gross monthly income," says Mr Busby.
There are buying costs including notary fees which could add as much as 10 per cent to the purchase price. Another potential snag when buying any property overseas is currency risk. As long as both the rental income and any mortgage repayments are in euros, this risk is minimal, but you may still be vulnerable when it comes to the deposit.
"Leaving yourself exposed to the ultra-volatile currency markets can easily see you lose thousands or tens of thousands of pounds in the blink of an eye," says Christina Weisz, director of foreign exchange specialists Currency Solutions.
Stuart and Katheryn Bell
The Bells have bought a new-build one-bedroom ski apartment in the French Alpine town of Avoriaz for €235,000 (£200,000) with more than one eye on the future. "The idea is to use it for a couple of weeks a year while we are in our thirties and forties, and then hopefully as we get nearer retirement we will get to spend more time out here," say Stuart, 35, and Katheryn, 34.
They bought their property on a leaseback arrangement so they own the freehold but the property is rented out by Pierre & Vacances for most weeks of the year.
"The leaseback return covers just over half the mortgage of €1,200 a month and we hope for some capital appreciation long term. The actual purchase process was easy with little more extra work than getting the documents translated."
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