Why France remains a strong favourite for property investors

Want a secure investment overseas? Try a leaseback apartment, says Graham Norwood

Speak to property investors these days, and they will talk of Eastern Europe's emerging markets, or how promising Morocco and Dubai are looking. But for all that, France remains a strong favourite, and with good reason.

Average property prices rose by 10.3 per cent in France in the 12 months to June, and with 60 million visitors expected this year, its second-home and investment markets are unlikely to disappear any time soon.

"Hard-nosed investors might want the higher returns of Bulgaria, but they wouldn't retire there," says Stuart Law of Assetz, a property investment consultancy. "Capital growth is slower in France, but the rental market is strong and reliable, underpinned by the tourism industry. And property prices, though rising, remain considerably lower than in the UK," he says.

In order to try to boost the quantity of accommodation in tourist hotspots and increase revenues, the French government introduced the Résidence de Tourisme classification, which is basically a leaseback scheme.

If a new development in France has negotiated Résidence de Tourisme status, a buyer can purchase the freehold of the property without paying VAT, and then lease it back to the developer for an agreed period with an annual rent guarantee, typically 3 to 7 per cent. At the end of the lease, the property is returned to the owner.

For the rentals company to guarantee the rent for nine years, the property must be in a high-demand location with good facilities, which would normally hold it in good stead for sizeable capital appreciation. The management company is responsible for upkeep, and pays all utility bills. The local taxe foncière is the responsibility of the owner. For a two-bed apartment in southern France, this is about €300 (£200) a year, although no taxe foncière is due on new properties for the first two years.

The freeholder can sell the property at any time. However, the longer the remaining period of the lease, the lower the sale price, and the seller would have to refund the government a proportion of the VAT discount.

But wouldn't you earn more if you bought a property and rented it out in the usual way? Generally, yes, but there are three points to consider.

First, your annual rental income would not be guaranteed. Second, if you use a lettings agent to manage your holiday home, you must pay them up to 25 per cent of all rentals. Third, you have to sort out advertising, maintenance, change-over costs and emergency arrangements.

Buying an older property in France usually attracts transaction fees of about 10 per cent. Leaseback transaction fees are only 4-5 per cent. Leaseback properties can be put into self-invested personal pension plans, or Sipps. To conform with regulations and attract maximum tax advantages, pension holders would have to cash in unit trusts and transfer the funds to a Sipp, then invest the pension proceeds tax-free in leaseback property.

But there are drawbacks to leaseback properties. As Penny Zoldan, of Latitudes.co.uk, a French-property website, says, "Some allow no subletting, and few people seem to sell during their lease period - they wait until it expires and either negotiate a renewed lease or sell".

It's also a specialist market: "Leaseback properties on leaseback developments may develop a separate market," she says. So leaseback property won't always appreciate at the same rate as "mainstream" homes in the surrounding area.

However, at least this French scheme does offer one of the few long-term guaranteed rental returns for investors - whatever happens in the market.