European Leasebacks - a simple guide for property investment

by Andrew Richardson

1. What is a leaseback investment?Let's try and explain the basics behind leaseback property investment.Typically found in France but also available in Spain and now Italy, leasebacks are government-backed schemes whereby the buyer purchases a freehold apartment in a serviced block, and hands that apartment over to a recognised leaseback management company for a fixed period of time. French leasebacks typically run for 9 years, and are renewable on a single occasion, thus offering a full 18 year rental guarantee Spanish leasebacks typically run for 10 years, and are not renewable, thus offering a 10 year rental guarantee The income from these leaseback guarantees typically starts at either 4.0 or 4.5 and is index-linked i.e. rises in line with a relevant cost index in the country in question. Exceptions to the rule are agreements whereby personal usage is required or others where a fixed (higher but non index-linked) is accepted. The leaseback income that forms the guarantee is paid NET of all management charges, so the 4.0 or 4.5 mentioned above (as examples) is the figure you receive. Closing costs can be higher than some other overseas property investments, often over 5 of the purchase price. Only deal with the largest leaseback developer in Europe, thus avoiding the smaller ones that may offer higher starting yields but typically fold or lower them after a few years. 2. Where are these leasebacks? I've looked at leasebacks in the following areas: Paris, France - french capital city leaseback. Prime 5* real estate with year 1 yields of 4.5. Priced from the €300s to over €1m. Superb 15th arrondissement location. Full 19.6 VAT refund. Just a great capital city location. Val d'Isere, France - french Alpine leaseback. Superbly located ski resort, with year 1 yields of 4.0. Famous building in La Daille, offering all the benefits of the French leaseback scheme along with VAT refund and very generous rental guarantee for a ski resort. Sotogrande, Spain - Spanish leaseback Terrazas Manilva, overlooking Gibraltar. Wonderful location. More complex yield options from as high as 5.15. 3. Why buy a leaseback? With so many other property investment options out there, why should an investor consider leasebacks as part of a portfolio? Leasebacks aren't for everybody. They don't necessarily offer the excitement of a pre-construction deal in an emerging market that may offer you the chance to double your money and flip the unit in 6 months, but nor do they come with the huge risks that that same opportunity brings (developer folding, inability to resell, inability to rent out etc.) However, for those looking for a stable base to a portfolio, where you don't want the hassle of managing tenants etc. and you want to know income is guaranteed year after year, a leaseback investment is a good option. Guaranteed rental income, index linked, for 10-18 years. They are SIPPable, unlike most other overseas property investments. Tax savings - all qualified leasebacks offer a VAT saving at purchase, typically between 10 and 19.6 depending on various circumstances. The key financial aspect is that one can secure € borrowing at low rates (below 4 at the time of writing) yet on the other hand secure guaranteed rental income of 4-4.5 rising every year. Thus, each year, the profit from rent vs. interest on borrowing rises. Under some circumstances, deposits can be as low as 10 of purchase price, so gearing can be used very effectively. See "Borrowing options" for more details. 4. Borrowing options for leasebacksIn line with most property investments, gearing is the key to success with a leaseback investment. For French leasebacks, the primary mortgage options are 70 LTV, 80 LTV and 100 LTV. These mortgages are always based on personal affordability i.e. take no account of the income (despite it being guaranteed). Please note that some mortgages work on the VAT-inclusive sales price and others on VAT-exclusive. Also, some require a deposit to be lodged with the bank for 10 years, and most do not. So, there are complexities. The 70 LTV option is the most common for leaseback investment, typically offering a fixed rate option. The 80 and 100 LTV option typically require a further deposit to be lodged with the bank for 10 years, to provide some additional security. They also require more strict proof of income. For Spanish leasebacks, the primary mortgage option is 70 LTV, but expectations are high that an 80 LTV product will arrive on the market shortly. 5. Taxation on leasebacks Whilst taxation will differ depending on personal circumstances, I can offer some guideline information on taxation for leaseback investment. Certainly for French leasebacks, your costs of ownership can be offset against your guaranteed income, thus ensuring that ongoing income tax will often be zero (or at worst, very low). Whilst capital gains tax in France starts at 16, after 5 years it drops to 10, and after 10 years drops to 0. Thus, by the end of your leaseback period, ongoing capital gains tax will also be zero. UK and France has a double taxation treaty. These products are SIPPable. Thus, French leasebacks offer a very tax efficient way into overseas property ownership, providing most of the benefits of a pension investment. 6. Leaseback summary Investors are offered a broad range of investment options to appeal to everyone, from the novice looking for their first property right up to the consortium looking to buy en-masse.These investment options cover many areas of the world and also offer alternatives for those specifically looking for capital gain, those looking specifically for income and those looking for a mix of the two. A leaseback investment, as described above, offers tremendously secure index-linked rental income. Combine this with a 15 year mortgage, and you will effectively own your unit outright at the end of the mortage period having injected little more than your opening deposit. This is a rare feat in the property investment world.With the taxation benefits of leasebacks, guaranteed index-linked income, low rate € borrowing options and prime locations, they do offer an excellent investment option for most portfolios. Ideal, in fact, for those that may have a high risk portfolio in place already and want to add some underlying security to it.I, for one, am buying one for the above reasons.If you would like to chat about these, please email me on the address below.

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