French Property - When To Buy
In our previous edition, Michael Hackney, explained how to buy property in France, principally for lifestyle reasons. In the second part of his series, Michael advises on when to buy, and how to maximise value when you invest.
“Buying at the middle-end of the summer can be more expensive, because, clearly, it’s a time of peak demand.There is a tendency to be able to strike a better deal between November and February. Most of these properties are not main homes, but secondary homes, so there is no guarantee that the price will be cheaper, the vendor may wait until next year to sell.”
“Look out for pressing issues, such as a couple divorcing, they will tend to be in a hurry to sell the property. Also, when it comes to investment properties, make sure you consider an exit strategy. Ensure you have sufficient budget not to leave a property semi-finished. If you offer a property for sale unfinished you are telling buyers that you really need the money. The same advice given for selling properties in Britain, applies in France - keep colours plain, and the bathrooms and kitchen in a good state. Most properties occupied by the same French people for 30 years or so, are not in good condition.”
“It is important to get access to as much information about your region as possible. Visiting with a range of background knowledge is important, use magazines, geographic comparisons with city properties for the whole of France, and for that region. Check out property prices per square metre; understand the different rates, and style – what is a studio for example? There can be startling variations in city centres across France. In Paris, the notaries produce a website with transactions recorded throughout Ile de France, and this is a mine of useful information about what is actually going on in the area.”
Return On Investment
“Languedoc year-on-year increases have varied a lot, though typically they have been double-digit increases each year for the last five years. It’s important to pick an area where local demand will not allow prices to slip back easily. The Cote d’Azur has held its pricing level, Paris too.”
“There is no guarantee of an increase in property prices. If, for example, price increases have relied on local incomes rising, and these rises have been held back, this will affect purchasing power. The general industry view is that France has had a rocketing success, but that it may be time to take profits, and reign in the enthusiasm - at least that seems to be the view among the banks that have been funding French mortgages.”
“However, there is a shortage of household space in France, and an increase in the number of divorces, which is the same as in the UK. People are living longer, and so the rate at which property can be passed on as an inheritance is slowing. French people are getting married later and this all helps keep demand reasonably high, and affordability strong. Look how surprised everyone was about London’s recent strong increase – but in the end price levels are all about supply and demand, and there is definitely still a shortage of houses in France. Add to this the likelihood of President Sarkozy introducing deductibility of interest payments on domestic mortgages (remember that in the UK?), and abolishing inheritance tax on property, and I believe that the French market still has a fair way to go”
“Refinancing in the UK, and earnings leverage, have changed a lot over the past 10 years, a six times salary mark-up is now technically possible, and 100% mortgages are possible. But in France, out of 100 banks, just four do equity release, or interest only mortgages. There is very strong demand in this market, and it does seem that this is an area of lending activity that will increase, and with its development, will come an improvement for property demand in France as people are able to afford bigger and better properties, and to fund more investments.” 
“We in Britain think that we invented the buy-to-let market, but in France, for 50 years, every doctor or dentist would buy one or two properties for rental every year, and end up with a portfolio of 20 or so on retirement. As much as 25% of the housing stock in France is privately owned and rented. That’s equivalent to 5 million buy to lets as against only 1 million in the UK.”
Building On Land
“Building on land as a business is not a problem. It’s a very regulated process, very clear, with zoning for each area. You can build a certain amount per sq metre on a plot of land, and you don’t have to have a detailed planning consent to get a mortgage for the property – you simply have to show you have put in for planning consent. It shows that there isn’t as much arguing about the details on a building, so long as your ratio of built area to land area is right.”
“Quite often there will be a presumption in favour of holiday accommodation. If the mayor, or the regional body, has decided that the zone has to be for holiday accommodation, then, it will be so; it is an equivalent to saying that this is a form of industry which should encouraged. Generally speaking, you will have to enquire as to the area zoning. “What’s the ratio?” will be the planning department’s first question - they will not ask what it will look like.”
>>Commercial Property
“On the commercial side, a company may want an office in France, maybe a factory, a small unit for engineering, or software development, essentially it is the same kind of process as for residential planning consent. We have noted that here is more wariness in France for equity release loans amongst the banks and this same wariness exists amongst lenders for commercial property. Many will specifically not fund factory units.
50% loan to value is commonly offered for development or investment finance. Values are much lower in France than in the UK, and investment preferences are different; for example they regard boulangeries as safe investments in France – just like pubs in the North of England. Boulangeries succeed because the French expect fresh bread every day. For the same reason, cafes with a concession to sell tobacco are also popular with investors!”
“A medium sized company will have to put up at least 30% contribution to get for an office building financed in France. Tenants under commercial leases usually have options to quit every three, six, or nine years - no 25 year FRI upward only rent reviews here! And because a company can move on in three years, the characteristics of the market are quite different; companies can be more mobile, and will take advantage of this; so an investor will have to have a spread of smaller properties rather than one or two large properties to compensate for the void periods that he will undoubtedly suffer”
“However, an investor buying on the French High St can expect upward only rent reviews, as all rents, both residential and commercial are linked to an index. The index is composed 40% of the RPI equivalent, and 60% of the index of building costs. I haven’t seen inflation go below 2% for a while, and haven’t seen the building cost index increase by less than 3- 4 % p.a. for a while, so there is a reasonable expectation that the annual rental indexation will be upwards.”
>> Germany
“Germany had a property boom post unification, with wild inflationary prices. This excess led to over construction of supply, and sadly, some major busts followed by deflation in the property sector. Everyone thought they prices would quickly bottom out, but while shoots of a recover are appearing, there are still some weakness in the German market. Prices in Germany are just about picking up, there is a regaining of industrial confidence, employment is rising, tax take is rising, exports are rising.
