Just when Britain is limping out of recession may not seem the most appropriate time to be snapping up a ski-resort apartment in the French Alps. But if you are looking to supplement a wilting pension or diversify your investment portfolio – or you're just a relatively debt-free mountain lover – it can present an alternative nest egg that's more viable than you might expect.
The key lies with the concept of leaseback which is when a buyer agrees to lease their property back to a management company for year-round rental. This arrangement works especially well in the mountains, which offer skiing during the winter and other activities, such as mountain biking and walking, in the summer.
Under a leaseback arrangement, all running costs, such as utility bills, repairs and maintenance, are met by the management company on the apartment owner's behalf. Property owners will be liable for Taxe Foncière however. which, depending on the region, is charged at between €10 and €30 per square metre a year. Contracts between apartment owners and their management companies must run for a minimum of nine years. After they expire, the contracts are rewritten on newly agreed terms.
The concept was developed by the French government in the 1970s in a bid to encourage individuals to invest in holiday homes that could accommodate the rocketing number of tourists. "France was, and still is, the most visited country in the world – with 83 million tourists annually – and, quite simply, there had to be enough beds for them all," says Nick Leach, the head of business development at Pierre & Vacances (P&V) – France's biggest developer and management company. "The vast majority of our ski homes are still sold to individual buyers on this basis."
The most obvious perk for leaseback property investors is that VAT (usually payable at 19.6 per cent on new-build property in France and between 5 and 14 per cent on renovations) is rebated to the buyer. And with larger management firms, such as P&V, buyers are not required to pay upfront at all.
The other bonus is that buyers are handed a contractual rental guarantee, which is calculated as an annual percentage of the property value. The level of return will vary according to the management company and the proportion of time the apartment is allocated for personal use. The idea however is that potential tourist or snow droughts that would pose a problem for owners renting privately will not be relevant.
Rental returns at P&V's three developments being built in the car-free ski resort of Avoriaz in Haute-Savoie are set at 3.5 per cent, for example – on the proviso that you don't use the apartment yourself. Prices of the apartments range from €200,000 to €1m. If you want a mix of holiday home and investment opportunity, there is the option to have partial occupancy rights. For example P&V's new luxury MGM Avoriaz development offers four-week occupancy rights with a guaranteed rental return of 2.8 per cent. One-bed apartments cost from €267,000 up to €875,000 for five-bed apartments.
But in the aftermath of the credit crunch, investors know all too well that a "guarantee" is only as good as the company issuing it. In the past few years, several smaller leaseback firms, including Transmontagne, Maisons de Biarritz and Immoconcepts, have gone bust. "They were simply unable to keep up with the unrealistic rental guarantees offered to investors – promises of up to 6 per cent in some cases," says Mr Leach.
Insolvency of a management firm is the single biggest risk to a leaseback investor, warns Keith Baker, the vice chairman of the international arm of the National Association of Estate Agents: "You will still be the official owner of the apartment but will either have to find a new management company or meet the charges and organise rental occupation yourself. You may also have to repay a percentage of the VAT that had been rebated. This is because, if the building is not used strictly as a tourist residence for a minimum of 20 years, the rebate no longer applies."
Only investors with a long-term outlook should consider leaseback. "To make a capital profit you will have to sell the property outside the nine-year lease term," says Seamus McConville, a director at Frenchleaseback.net – an estate agent for Britons buying leaseback homes in France. "Any sale within this time span and you could even make a loss as contracts differ and there could be penalties to pay."
The fact that 100-per-cent mortgages are available on French leaseback homes could also ring alarm bells – though, according to Mr Leach, this is what's helped P&V sell 345 of its 475 Avoriaz apartments already. In reality, the survival of some 100 per cent loans is testament to the conservative stance of French lenders, and lending criteria in France are especially tight.
Clare Nessling, the operations director at Conti Financial Services – an overseas mortgage broker – says: "French lenders will want to see that 35 per cent of your gross monthly income is sufficient to cover the new mortgage and all of your existing liabilities in the UK. Affordability is therefore based on existing debt rather than income levels; that's why France has fared relatively well in the downturn."
The typical minimum deposit when buying via traditional means is 15 per cent of the property value – though 100 per cent loans can be sourced against homes worth over £300,000. Mortgage rates start at 2.45 per cent variable and are slightly higher for 100 per cent deals at around 3.5 per cent, says Ms Nessling.
Getting a mortgage agreement in principal is a good first step, she adds: "It doesn't cost anything and presents you with a budget before you fall head-over-heels in love with a ski apartment."
Whichever route you take, buying fees will apply. If you buy an existing property, "notary fees" – which incorporate all costs including stamp duty and mortgage regulation tax – will amount to between 7 and 10 per cent of the property price, says Mr Leach.
As always, keeping your wits about you is a good idea. You do, however, have a safety net. All homebuyers in France have a seven-day cooling off period after exchange of contracts in which to change their minds.