VAT Rebate
One of the key elements to any successful property investment is to structure your purchase as effectively as possible. As investors we want to keep our own cash outlay low, gain maximum returns through leveraging, and cover the costs of financing with rental income. These Best Western apart-hotel rooms offer all of these benefits. In addition, the 14% discount and the VAT rebate give you that little bit extra.
How do I claim the VAT back?
As a leaseback property in France is classed as a commercial asset it is possible to claim back the VAT payable on the purchase price. As our development is a refurbishment project, the average VAT on each unit is around 12%, (not the 19.6% which is only due on new-build property). It is optional to claim back your VAT. For instance, if your plan is to hold it for less than five years, you might not use this opportunity. Your notaire will be able to guide you through the process (a fee of approximately €275 is normally applicable).
The VAT rebate will be paid to you in full approximately three to nine months after completion. Of course every investor is in a unique position but it may make financial sense to keep this surplus cash in France and use it to pay off a lump sum from your mortgage. This will help lower monthly payments and to maximise returns.
VAT Repayment
Investors should note that the French government encourages long-term property ownership. If you sell during the first five years, you have to pay back your reclaimed VAT to the French Government. Please consult your property advisor for further details.
Rental income – 5.09% guarantee for 11 years.
An advantage of the French leaseback system is that your rental income is guaranteed over a long period. This gives stability and security to your investment. Yields also include all maintenance and management costs, which means no additional unforeseen outlay.
Higher yield than comparables
As French leaseback yields are based on the purchase price excluding VAT (as this is repaid to buyers), a 4% yield is about average, anything less than 3.5% is deemed low and 5% or above as very good. The rental yield at the Best Western is guaranteed at 5.09% exclusively for Ready2invest customers. For an average property costing €115,338 this would deliver a net annual return of €5,871, or €489 per month.
Impact of Inflation
What’s more your yield will increase each year to account for general inflation, which ranges from 1.5% up to a legal maximum of 2.5% p.a. (which has been achieved for the last three years). This is paid by the management company. For example if you achieved a conservative 2% inflation then the €5,871 income of year one would become €5,988 in year two and so on - and providing you with a yield of 6.08% by year ten.
Average yield for leaseback is 4%.
This deal offers 5.09%.
Value for money
A French leaseback property is classed as a commercial investment. Therefore its value is determined by the yield it produces - not on its purchase price (though the Best Western development is competitive in that area too). As you know, we have negotiated on behalf of buyers a discount of 14% to the local market list price.
This is a key aspect of the investment. As rental yield is calculated as a function of rental income over purchase price, buying at a lower price while the rental income stays the same will boost your yield. This is why a relatively high yield of 5.09% is available.
What’s more, French investors are happy to buy leaseback property which delivers around a 4% yield, so there is room for some yield compression when selling your unit. It could be possible to sell your property at a higher price but with a lower yield to gain some immediate value. For example, buying a property for €115,338 with a rental income of €5,871 delivering a 5.09% yield would sell for €146,768 with a 4% yield – a gain of 27%.
Profit forecast
In the same way that its value is based on its yield, French leaseback property also differs from more traditional property investments as capital growth in the market has little bearing on its value. Rather, it is the growth in rental income, increasing the yield, which reflects on how much your property will be worth.
Therefore it is very important that a guaranteed minimum rate of inflation is in place for your rental income as this guarantees growth in the value of your unit. As mentioned, an inflation rate of 2.5% p.a. is possible, especially with the changes to the economy that Sarkozy may bring about. However, even assuming 2% inflation, the numbers still look good.
The table below shows the potential profit forecast based on a unit at the Best Western priced at €115,338 excluding VAT. With the 14% discount to French prices, 2% p.a. rental inflation and selling at a 4% yield, the potential sales value could increase as follows:
Calculating value based on yield
The value of a commercial property can be calculated by dividing the annual income
by the required yield. For example, if annual income is €5,871 and the desired yield is 4% then: €5,871 / 4% = €146,775.
Example of future value based on selling with a 4% yield.
Finance
Financing your investment with a mortgage makes sense. The initial capital outlay is lower and the leveraging effect a mortgage often helps you make the most of your investment.
The French mortgage market is one of the most mature in the world and many different banks and lenders will offer mortgages on leaseback property. However, while it is tempting to use such sophisticated products to leverage 100% of your property value, we would urge you to err on the side of caution and take a balanced approach with your level of borrowing.
One of the benefits of a mature mortgage market is that you are able to find out if you can get mortgage pre-approval relatively easily. As mortgages in France are status based the options and products available to each buyer are dependent on individual status. However general guidelines of terms are as follows:
Interest-only or Repayment
Interest rates from 4.2%
Terms up to 25 years
Up to 90% loan-to-value
Add VAT to the mortgage.
To minimise cash outlay it is possible to include the VAT in the mortgage. So depending on your financial status you can borrow in total up to 90% of the purchase price of a unit including VAT.
Some mortgage lenders do charge a fee for mortgage setup. In addition you will need to setup a French bank account to both receive rental monies and make mortgage payments. Most lenders will help you open one directly with the lending bank.
Did you know?
Some French mortgages work on a variable rate and variable term basis. So if interest rates fluctuate the term of your mortgage is extended or shortened in order to keep your monthly payments the same. This adds another level of stability to your investment.
Rental income vs mortgage payments
Property investors generally aim to stay cash positive – i.e. to cover their mortgage payments with rental income. As the rental income at the Best Western is a guaranteed net amount, and interest rates can be fixed, there are certain levels of borrowings that will allow you to remain in the black.
The following examples indicate the upper level of borrowing advisable at specific interest rates which would allow you to stay cash positive for a Best Western investment. Don’t forget that your rental income will increase each year so to begin with there is little “buffer” room between income and payments.
Example 1 – Interest-Only mortgage
Example 1 assumes a purchase of a €129,224 unit, an 70% LTV interest only mortgage at 4.2% p.a. Note that the VAT rebate will be available to provide cash for additional payments if necessary.
Example 2 – Repayment mortgage
Example 2 assumes a purchase of a €129,224 unit. A repayment mortgage of 4.9% over 25 years is assumed.
As you must pay both interest and principal on a repayment mortgage, monthly payments are higher. This may mean that you will need to subsidise the mortgage payments for a few months until the VAT rebate is received. Thereafter the rebate could be used to lower monthly payments.
Please note that the above two tables show example scenarios only. While the figures are based on mortgage options currently available, the exact product you will be able to get will depend on your individual financial status.
Return on capital
As mentioned, your future sales profit is based on the rental yield you can pass on and not on anticipated capital growth. The following table demonstrates your cash outlay, net cash flow and potential returns over a 10 year investment, for both an interest-only and a repayment mortgage based on the purchase of a €129,223 unit.
ASSUMPTIONS: A purchase of a €129,223 unit. 2% rental income inflation p.a. VAT rebate option taken. Municipality and insurance costs of €700 p.a. – this figure may vary. Ready2invest fee of £2,500 + 19.6% VAT. Please note that the above table offers an indication to potential profit only – variations in mortgage product, local taxes, inflation rate or sales value will vary individual investor returns.
Repayment vs interest only mortgage
So which mortgage option is better for you, repayment or interest-only?
The benefit of choosing an interest-only mortgage over a repayment mortgage is that the monthly payments for an interest-only mortgage are lower. And due to the conservative nature of French banks the maximum Loan to value currently available on an interest only product is 70%.
Based on the scenario table opposite, over the early years on the investment, your potential return on capital with an interest- only mortgage is higher than that of a repayment mortgage. This may therefore be the best option for those looking for a short term. (Although note the sharp jump in year five when the VAT rebate kicks in)
The payments on a repayment mortgage consist of both an interest part and a principal repayment part. At the beginning of the term the interest part or your payment is much greater that the principal. But as time passes your equity in the property increases and your debt subsequently decreases. Therefore towards the end of the term the principal repayment part becomes much larger than the interest part.
This means an increased amount of equity (cash) is available to you on sale the longer you hold the property for. Don’t forget that this is mostly paid for by the rental income. So your overall profit, when you sell in later years, becomes far greater on a repayment mortgage than an interest only option. A repayment mortgage may be more suitable then for investors looking for a mid to longer term investment.
Exit strategy
We see these leaseback units as medium- to long-term investments. Good returns are more likely if the property is sold after at least five years, where the VAT rebate does not have to be repaid, adding to your cash on cash profit. If you intend to hold the property long term, then a repayment mortgage may be a more profitable option.
Your onward sale will be primarily directed toward property investors, either French or international. The location, minutes from Disneyland Paris and only 35 minutes from central Paris, in an up and coming green and vibrant area with an established business park hosting companies such as Sony, IBM, Nestlé and AXA Insurance, makes for a very attractive investment package. Furthermore, the great purchase price of these units (14% below the list price) means you can sell on for a profit and yet still offer a competitive, attractive yield that may help encourage a quick onward sale.
What’s more, as part of Sarkozy’s drive to create “a nation of homeowners”, he is introducing tax incentives to encourage French people to buy houses. This will boost demand for property and further help you when the time comes for your onward sale.
Leaseback property can be sold at any time and the existing lease can be passed on to the purchaser. You could potentially market your property through local Parisian estate agents, general property websites or through more specialist
investment channels.
The management company will cover the running costs associated with your unit. However, the following ongoing costs also need to be factored in:
Mortgages
The mortgage market in France is similar to the UK’s - it is mature and sophisticated, with a wide array of financing available, including fixed and variable rates, repayment and interest only options. This choice makes it possible to source financing that is appropriate to your circumstances and tailored to fit your investment strategies and requirements. Investors buying off-plan in France are also protected by a raft of legislation, making it an extremely safe place to buy property.
About the brokers
The three mortgage brokers provided on the right are for guidance only - you are free to source your own mortgage provider. However, we have contacted them and their lenders have pre-approved the development. Please note that the level of loan-to-value and interest rate available to you will depend on your financial circumstances as French mortgages are status-based.
Blevins Franks Mortgage Solutions
Fernando Canales
Fernando@bfms.co.uk
Tel: 0207 015 2122
Fax: 0207 015 2222
http://www.bfms.co.uk/
3rd Floor
29-30 Cornhill
London EC3V 2ND
Savills Private Finance
Miranda John
mjohn@spf.co.uk
Tel +44 (0) 20 7409 5967
Fax +44 (0) 20 7491 3926
http://www.spf.co.uk/
Lansdowne House
57 Berkeley Square
Mayfair, London W1J 6ER
French Riviera Invest
Jillian Woodward
jillian@fr1vest.com
Tel: 0033 622 009 056
Fax: 0033 493 00 11 39
Résidence Croix des Gardes I
11/13 bd Cointet 06400 CANNES
Notaire
We have instructed a legal firm based in the UK called Live Overseas to liaise between an independent notaire, Maître Montcerisier, in France (a specialist French property lawyer) and you the investor, to guide you through all the legal aspects of buying a leaseback property in France.
The notaire fee for a Best Western apartment is a competitive, fixed €7,000. This includes mortgage registration fees and power of attorney . 70% is due on contract with the remaining 30% due at completion in December 2007.
Please use Live Overseas as your first point of contact.
The contact details for Live Overseas are:
Live Overseas
Academy House, 403 London Road
Camberley, Surrey, GU15 3HL
Phone: 0870 191 3099 Fax: 0870 191 3002
email: info@live-overseas.co.uk
http://www.live-overseas.co.uk/
The contact details of the notaire are:
Maître Montcerisier
24 Rue de Madrid, 75008 PARIS, FRANCE
Phone: 0033 1 44 70 94 94
Fax: 0033 1 44 70 03 09
Currency
Currency Exchange
Small differences in exchange rates make a big difference to the end amount you pay, and specialist companies compare extremely favourably to the high street banks. Ready2invest currently works with Moneycorp and Currency Solutions, currency conversion companies in London that offer an extremely personal service and excellent rates.
Moneycorp
Moneycorp, the UK’s leading foreign exchange company, can help you achieve the best exchange rates, making your money go further. They have been trading foreign currencies since 1979 and are the only foreign exchange company in the UK to have been certified to ISO 9000 Quality Assurance.
In addition, you can take advantage of the
following benefits:
No commission charges or receiving bank fees.
Fast, efficient worldwide transfers.
A dedicated dealer to guide you throughout your currency transaction(s).
Extended office opening hours
Monday - Friday 7:30am - 10:30pm
and 10:00am - 4:00pm Saturday.
Moneycorp offers a very straightforward, efficient and cost-effective service. Exchanging and transferring money is an easy three-step process:
1. Open a trading facility - you can register
online by visiting the Moneycorp website at
http://www.moneycorp.com/ or calling their London
office on +44 (0)20 7589 3000
2. Book a transaction - once a trading facility
has been set up, a dealer will call you and
discuss your individual requirements with
you. Rates are booked with your dealer over
the telephone
3. Transfer your funds - dependent on the date you
require your currency
Our contact, Ben Nicholson, is always available
to take your calls at their London office and can be reached on +44 (0)20 7823 7500
Currency solutions
UK’s premier foreign exchange company for clients purchasing property overseas. Their up-to-the-second trading facilities allow you to trade or fix the exchange rate on your purchase at the most opportune time, saving you money.
• Best exchange rates. Rates are guaranteed to better any bank or financial institution saving you money.
• First-class personal service. A dedicated personal dealer makes everything simple and hassle free.
• No hidden costs. Every penny will be accounted for. There are no extra charges and the service
is free.
They say:
“Exchange rates change constantly throughout the day, so the sooner you approach us, the more time we have to find and guarantee the best exchange rate available for your purchase timeframe. With a range of options to satisfy the most demanding of customers, rest assured your personal dealer will guide you hand-in-hand through all the trading options to match your requirements.”
Nigel Hodges, our dedicated R2i dealer will be happy to answer any questions you have. The London office number is 08700 42 43 44 or check out http://www.currencysolutions.co.uk/.
The Ready2invest fee
The R2i fee for a unit in Best Western Marne la Vallée is £2,500+19.6% VAT (£2,990) payable for every individual reservation made.
What our fee covers:
FINDING THE DEAL
Finding the deals through our network of international finders.
Personally visiting all developments for
face-to-face meetings with key personnel and viewing the sites.
Negotiating the discount using R2i reputation and buying power.
Financially structuring the deal for maximum returns.
Completing extensive research and due diligence on:
• Title
• Planning
• Legals
• Country and town
• The development
• The developer
Securing protection for your investment.
Sourcing reputable local English-speaking lawyers in every country wherever possible.
Negotiating favourable fee structure
with lawyers.
Service
Our Investor Relations staff help you through your entire investing process.
Their roles incorporate:
Answering any questions you may have during your investment process.
Guiding you through the contract and payment process.
Helping arrange a Power of Attorney if necessary.
Help organise and liaise with mortgage companies where necessary.
Arranging site visits (1 week’s notice needed).
Help source and organise furniture packs where appropriate.
Help source local letting agents
where appropriate.
Update you on the progress of
your investment.
Provide a friendly ear for any worries
or queries you may have regarding
your investment.
What we don’t do:
We don’t arrange mortgages
We don’t convert currency
We don’t manage finished property
We don’t advise on tax
About Ready2invest
When Jonty and Alise Crossick sold their retail business and moved into property in August 2003, they invested just £300,000. Twelve months later they were sitting on a property portfolio worth over £7 million with equity of over £3.5 million.
In October 2003, Jonty and Alise set up Ready2invest Limited to share their property strategy with others and deliver a professional investment brokering solution in a fragmented market. The company has become well known for its thorough research and due diligence, and for negotiating and engineering exceptional deals in the marketplace.
“We think like investors, we behave like investors and we personally invest in the developments we launch. Ready2invest grew out of a need to group together with other like minded investors in order to create the buying power to get great deals.”
Over the past two years, the company has built up a customer base of over 20,000 investors, and has achieved over €300 million of off-plan sales in many countries across Europe, each with its own administrative and legal procedures.
“Our job is to build trust with the developer and trust with you. If you know that the properties we offer are well researched, superbly priced, judiciously selected and located in prime spots, then we believe you will buy through us. If the developer is confident that we can sell a lot of properties quickly and efficiently, thereby taking some of the pain out of his transaction process, we can negotiate unbeatable deals with him. The result? You, the investor, wins. The developer wins. And we win.”
Next steps
To reserve a Best Western Marne la Vallée apart-hotel unit, please complete and sign the Reservation Form and return it to us with a non-refundable reservation cheque for £2,500 +19.6% VAT (£2,990 in total).
Reservation cheques should be made payable to Ready2invest (Best Western Marne la Vallée). Please send a separate cheque for £2,990 for every unit youwish to reserve.
If you are as excited as we are about investing in France, then call us now on 01273 627 900 and speak to one of our property consultants.
For full registration details including the Registration Form and a list of Reservation Terms and Conditions, please download the full brochure as a PDF below.