Hassle-free holiday homes with returns

By David Stevenson
Published: October 30 2009

Talk to foreign property specialists, and they all marvel at the British obsession with house prices – and our proclivity to treat residential homes as a form of long-term investment.
 
In fact, the UK director of the French property leaseback and rental company Pierre et Vacances (P&V) recounts that British investors' first questions are always: what's the yield, and what's the potential annual capital uplift. By contrast, French invest-ors ask if there's a sea view, how big the car park is, and whether the hi-fi will take an iPod. It seems that the French – like the majority of continentals – purchase properties based on the quaint idea that they might spend some time living in them.
 
However, the British obsession with foreign property investment has gone through phases. Initially, Brits who felt priced out of the domestic market for buy-to-let and holiday homes started buying cheap overseas properties, or apartments in off-plan developments, often in the middle of nowhere. Budget airlines moved in to many of those remote locations and suddenly these markets became "normalised".
 
Then a new problem became apparent. Second homes may be a charming dinner-party topic but they involve an awful lot of maintenance and expense.
 
Cue the latest phase: property syndicates. Last year, I looked at one of the best of these, called Rocksure. New entrants are appearing all the time – the latest is a fund called Safe Haven Property. This is how they work: a structured limited-liability offshore vehicle buys up a collection of swanky villas in diversified locations, to be enjoyed by members of the "club", and takes over the hassle of physically managing them. Investors have to put in between £50,000 and £150,000, but cannot use debt to finance the "investment".
 
There is a more conventional alternative, though: French leaseback struct-ures. They offer some of the attractions of physically owning properties, backed by debt funding, but again without the bother of actually managing them. Under a leaseback arrangement, you buy a property at its market value and lease it back to a management company that maintains it and rents it out. You get the rental income, the chance to holiday there yourself and any capital uplift.
 
This can be very tax-efficient as VAT can be claimed back on new-build property and there's no local French capital gains tax to pay if the property is held long-term. A fixed lease can provide a yield of up to 7 per cent, and French mortgages can cost as little as 4-5 per cent.
 
For UK investors, P&V dominates the leaseback market – and is cementing this position in two ways.
 
First, P&V's parent company is aggressively expanding its franchise, launching new brands (it owns the Centerparc franchise on the continent), and expanding into new markets. A big new development in Morocco is scheduled for 2010.
 
Second, P&V is putting the finishing touches to a new self-invested personal pension (Sipp) scheme to be launched in the new year, allowing investors to hold a property within their pension, free of UK taxes, and with debt finance.
 
A trial scheme was launched a few years back but was put on ice because of legal uncertainties. Most of these have now been ironed out. In fact, a smaller rival firm came out with its own version of a Sipp leaseback scheme only last month. I reckon the ability to put a swanky ski apartment in a Sipp will be a huge selling point – but note that you won't be able to benefit from its use, because of the "benefit in kind" rules.
 
My better half has already bought an apartment in the ski resort of Val Thorens as an ultra-long-term pension investment – her pension contributions provide the monthly capital repayments.
 
One final word of warning: there's also the ever so frightful prospect of having to deal with French mortgage banks. As a rule, these institutions tend to be enormously conservative and staggeringly bureaucratic. Their credit committees make the Inquisition look positively friendly!
 
Copyright The Financial Times Limited 2009.