Sale and leasebacks: were they - are they - a good idea?


Some buyers got stung, some want to sell, and many are happy to hold onto their long-term investment. What's the future of sale and leaseback properties, asks FRANCES O'ROURKE?

FRENCH SALE and leaseback properties – where buyers sign a lease with a management company to completely rent and manage a property they have bought – once so popular with Irish investors, have become something of a bête noire.

The collapse of management companies, like ski resort company Transmontagne last year, and more recently, ResidHotel, left many owners without rents to cover mortgage repayments and fearful of having to pay back the 19.6 VAT rebate given to them when they purchased. Unsurprisingly, this is scaring off some potential new buyers.

There are many questions you can ask about French sale and leaseback properties, but the big ones are: should new buyers be tempted to invest in developments being offered for sale? And if you have already bought but want or need to sell because of the recession, can you do so and are there penalties for selling? And is there anything that can help investors caught out when a management company collapses?

Sale and leaseback developments began as a French government device to promote newbuild accommodation in tourist areas: a 19.6 per cent VAT rebate was given as a tax incentive to buyers, who had to sign a nine or 11-year contract with the development’s management company to lease back the property to them to rent out. It is, effectively, a commercial lease.

In exchange, the management offered a specific return – usually 3–5 per cent – and handled all the lettings and so on themselves. Most offered buyers the choice of using it for one or two weeks a year or more themselves. It appealed particularly to small investors, the kind of people who might never have considered buying overseas before.

Many agents selling leasebacks implied – or said outright – that the tax incentive meant that their developments were French government backed, or guaranteed – a word thrown around by overseas agents with abandon: in hindsight, it is now obvious that the tax incentive was of course no more a guarantee than a Section 23 tax incentive is here in Ireland.

Others promised serious capital appreciation, clearly something that no one can guarantee as all Irish property owners are by now too bitterly aware.

All investments carry a risk but in this case, it was one that few buyers would have anticipated: that the management company with which buyers signed the leaseback deal might go out of business.

There are plenty of lucky Irish buyers who invested in well-managed developments that have lived up to their promise: rents as promised lodged to their accounts regularly that may cover nearly all the cost of mortgage repayments. They are lucky because it’s probable that very few Irish buyers checked out the track record of their management companies independently.

The tales of woe of those caught by companies that have gone out of business or into administration can be read on property blogs and make for unhappy reading. It is possible to survive this reverse: in some cases, a new management company takes over the business, although they may offer lower rents to owners. Some owners break their lease (although this must be done legally, as with all things in France) and sell or rent the property on their own. At the least, it creates a huge amount of hassle for these owners, and at worst, serious financial loss.

Nonetheless, agents for sale and leaseback properties stoutly maintain that in general, they are a sound, if unspectacular, investment. Where else, they ask, could you invest money and get a return of 3–5 per cent right now? Some also warn that offers of returns over 5 per cent are suspect, because they’re unlikely to be sustainable.

John Busby of Pierre et Vacances, one of France’s biggest and oldest sale and leaseback companies, says “extremely low interest rates and unreliable financial markets have reinforced the attraction of French leasebacks as an effective property investment – but you want to do your homework to get the right leaseback and avoid troubles of a defaulting management company.”

Doing your homework means finding out about the management company: Benoit Coste, vice-president of the Confederation Europeenne de l’Immobiliere (CEI), which represents estate agents from 14 countries, advises that one of the bigger companies – like PV or Odalys – with a proven track record are preferable. If you don’t know, you could ask an organisation, like CEI, for some guidance.

Some pundits say that it’s better to look for a scheme where the management company is separate from the developer – because a developer is not an expert at managing and letting properties. But this is still no guarantee of a sound management company, and Pierre et Vacances, which has done both, for many years, say, of course, exactly the opposite.

What if you are one of the many people who bought a sale and leaseback a few years ago and now want to, or need to, sell, even though you’re only a few years into your contract: is there a market for these properties, and what are the penalties?

Eilís FitzGerald of Overseas Café.com says that the issue of selling them doesn’t come up as often as with non-leaseback properties because most people buy them as a long-term investment.

“In our experience, it is not something that is generally achieved all that easily. The fact that there is a lease attached to the property makes it a rather inflexible property vehicle, particularly if you want it for regular use of your own. Because the property must be let out for specific periods, the pool of potential buyers is quite small.”

You can sell without having to pay back any VAT if you sell it with the lease intact. But, says FitzGerald, “this type of investment product doesn’t appeal to a huge amount of people to begin with” and finding buyers can be quite a task.

She adds: “You can, if you wish, sell a leaseback without the lease, but it will require that the VAT is repaid pro-rata to the French revenue. Capital gain on leaseback properties also tends to be capped as rental income is tied to the property value. A property offering a 3 per cent yield on its initial purchase price is not going to be very attractive if its capital value increases by 20 per cent. Yields are index linked, which means that capital gains tend to be as well.”

However, if you have a reliable management company, you should discuss it with them first: Nick Leach, sales director of Pierre et Vacances, explains that his company “which is about five times as big as anyone else” handles second-hand sales for its owners all the time, and has a ready pool of buyers amongst the thousands of people who holiday with the company”. (Its owners are also free to sell on the open market.)

As always, buyers – and sellers – should do some research, get independent legal and tax advice, and make a decision on whether to buy or sell a leaseback with caution.

Some useful contacts:

Solicitor Tom McGrath at (CEI)

Fiscal counsellor, French Embassy, London

0044 207 8319048 (available to public Tuesday and Thursdays from 2pm-4pm)

On sale on the slopes

PIERRE ET Vacances, a major European tourism property development and management company, is selling new sale and leaseback properties in Avoriaz, the ski resort overlooking the Morzine valley on the Swiss/French border where the company was founded nearly 50 years ago. It’s in a large ski area called Portes du Soleil.

PV manages close to 1,200 apartments there and is now building 475 more, with prices ranging from €190,500 for a one-bedroom apartment and €333,000 for a three-bed in a three-star development, and from €267,000 to €875,000 for one to five-bedroom apartments in a four-star and a five-star development.

Returns offered range from 3.2 per cent to 3.75 per cent for the three-star apartments and from 2.7 per cent to 3.75 per cent for the four/five-star units. The rate is determined by the number of weeks use by owners, who have the option of using their property for between two and eight weeks a year.

It is looking for initial deposits of 2 per cent and offering to arrange mortgages of 99 per cent. The first phase of the new developments are to delivered by 2011.

As well as the ski-in ski-out apartments, PV is also building a “tropical paradise”, a water-park for use as après ski in winter; in summer, it will open up and provide outdoor beaches.