An interview with Mark Courtney from Property Showrooms with Leapfrog Properties MD Nick Dowlatshahi concerning the French Property market in 2014
MC: In which country do you sell property and to what level has the real estate market in your country been affected by the global crisis?
ND: We only sell in France and sales volumes actually increased quite sharply shortly after the crisis kicked in as developers offered better deals and 100% finance was still around as there was a delay to the squeeze on the banks in France which meant that 100% finance was on offer up until the summer of 2011. After this point bank lending criteria in France tightened considerably and they also withdrew their 100% finance offers which meant sales were slower especially as the UK economy was suffering quite badly and people had a lower appetite for investment in overseas property. Since Feb 2014 however we have seen that demand start to soar again as UK & international buyers become more confident in their own financial stability and are willing to invest on more reasonable and realistic terms and willing to bring 20 to 30% deposits typically or even buying with cash. Now though, more than ever, buyers scrutinise the investment they are making and are basing their investment on the fundamentals of investment (location and quality) rather than guaranteed returns as was the case before. Sales in France as a whole have been slow during the crisis but prices have remained relatively stable since lending criteria by French banks has always been subject to status with relatively strict lending criteria meaning mortgages are only given to people who can afford them. As such foreclosures on private owners are minimal and therefore we don’t see the booms and busts of many other countries like USA, Spain or even the UK but instead steady price growth or steady falls if any. Interestingly though there are some fantastic deals out there where developers are forced to repay their bank loan quickly because the developments have been completed but where they still have a considerable amount of stock remaining (typically 30% or so). These bank induced sales (which are not foreclosures but simply pressure on the developer from their lending bank) have produced some amazing investment opportunities for us to promote in locations such as Paris, the cote d’Azur and the Alps where we are seeing some prices slashed by around 50% meaning properties that were generating NET yields of around 4% before the crisis are now generating around 8% NET which in a country as stable as France is a truly fantastic opportunity for property investors.
MC: Have property prices risen or fallen in the last 12 months, or have they bottomed out?
ND: Prices in France have remained relatively stable and if they have fallen it has been by only around 5 to 10% typically and I don’t see prices falling further as a whole but just the odd opportunity that comes up as indicated above.
MC: What advice would you give property owners in your area now who are thinking of selling up?
ND: I think if you want to sell now then you need to price your property competitively since the market is generally slow so to stand out you need to be visibly offering a good deal. Alternatively you can price with the market but then, unless you have something special you may be waiting a while to achieve your sale. If you are not under financial pressure to sell then I would advise that you hold onto your French property since the market will get going again over the next few years.
MC: Does property in your country represent good value for the investor and if so, why?
ND: I only think they represent good value where developers on completed properties are slashing prices and you can visibly see that the price is below the market price or if an off-plan property then it would need to be around the market price and not necessarily cheap but instead be very good value and have a uniqueness about it ie a great location with fantastic properties and perhaps some facilities with a good rental market and a good rental management structure to offer attractive but realistic returns. The general market price for off-plan properties with no facilities is about 25% higher than existing older properties so if you can pick up an off-plan property which is around the market price with unique attractive features then I also think these will turn out to be great investments since developers are having to really squeeze their margins at the moment in order to offer this kind of price. In addition interest rates on mortgages in France are so low at the moment (from around 2.3%) so if you have a good financial profile then if you can find a property that matches those criteria I have mentioned then I think it’s a great time to buy in France as you will be considerably cash-flow positive even with a high LTV mortgage if you choose to rent it out.
MC: How long before the property market in your country returns to pre-crisis levels and what can we do to avoid the same situation again?
ND: I think it will take a few years before sales return to pre-crisis levels so perhaps 2017. As mentioned lending criteria in France has always been fairly strict but being in a global financial world they can’t help but be affected by the global squeeze on credit. France also lent large sums of money to the Greek government pre-crisis and were one of the worst hit by Greece’s financial problems as so much debt had to be written off and I think this affected many of the large French banks and their appetite and ability to lend as it was pre 2011. I also think that 100% finance should generally be avoided by banks as buyers should always have some “skin in the game” as it were otherwise it is just too easy for them to dump the property as soon as things don’t quite work out for them and let the banks take the loss which in turn makes them more reticent to lend in the future. Investors should go into a property investment with eyes wide open and ask plenty of questions and really study contracts both in relation to the build and the management and any guarantees on rent offered: all too often buyers feel they are too busy or just don’t have the inclination to spend the time going through the contracts in detail and unfortunately this can lead to investing into something that they otherwise would not have done had they read the details and performed full due diligence checks on the properties as personally I don’t think you can rely on the agent having done this and just base your investment on the agent’s comments. Agents should also be as clear as possible and invite as many questions from the buyers as possible so that they feel fully confident in what they are investing in.
MC: From which country do you find the majority of your property buyers are coming from? Has this changed significantly over the last 5 years?
ND: Currently we have a very international mix of buyers coming from the UK but also from Sweden, Italy, Eastern Europe, USA and many others. This is quite different to 5 years ago where 95% of our buyers were from the UK.
MC: What attracted you to selling property in the region?
ND: I have always been on holiday to France since I was little whether it was skiing in the Alps or relaxing on the beach on the Cote d’Azur so I spoke the language and therefore found it relatively easy compared to others to go into this market. It is also the most popular location in the world to invest for UK buyers, along with Spain so I knew that there was a large and consistent market here and worth spending time on setting up a business to cater for these buyers, which I eventually did in 2004. It is not like many other countries which tend to have only sporadic moments of interest as investors try and get on the bandwagon of a market which is apparently experiencing capital growth. France is the consistent performer and very popular due to its renowned culture, history, climate, food and wine and in addition it is easy to get to from most parts of Europe, especially the UK. Lastly I think it made sense to set up a business in a country with a tight legal system as you are far less likely to have legal problems with either the projects themselves which leads to problems for clients or with payment.
MC: What would you estimate the percentage split is between local buyers and international buyers?
ND: Leapfrog Properties deals almost exclusively with international buyers. That is not to say we don’t occasionally deal with local French buyers but it is not our target audience as local French people often deal directly with local estate agents as they don’t need the extra guidance and support that international buyers do.
MC: Do you believe the local Government in your market country is actively encouraging or discouraging foreigners into buying property? How and why?
ND: I think since Francois Holland took charge in 2012 the measures introduced have put some international buyers off as the headline is always used to win support from their members and voters. When you look at the detail however the changes he has made actually affect international buyers very little. The main 2 changes were an increase in tax on rental income and on capital gains tax. For income tax it rose to 35% however the types of rental properties we typically sell are structured with management companies on site which gives huge tax advantages for the buyers as they can offset 90% of the property price against any income tax due along with the usual running costs and mortgage interest so the result is that buyers end up paying no or very little income tax in France on the types of developments we sell. The capital gains tax situation is different and this is worse as it has gone from 19% to 35% and the period over which it is gradually reduced to zero has gone from 15 years to 30 years so if you sell after having owned your property for 15 years now you will pay some capital gains tax (although it will be lower than 35% as it will have been reduced over time) whereas before you would have paid none. I don’t however think this has made a big debt in sales for our clients nor for France as a whole as by the time you sell in 5 or 10 years time the government will have changed and the tax rules they bring in will be totally different but it doesn’t help.
MC: What’s the biggest benefit for investors of buying in your country over anywhere else?
ND: This is mostly already answered in question 7 as the reasons why I was attracted to sell French property but I would say the its renowned culture, history, climate, food and wine and in addition to its easy access from Europe are the biggest benefits. It is also not a fad amongst investors and will continue to be popular for many years to come providing a decent re-sale market and good, steady capital growth in the medium to long term. Lastly its legal system is very protective so buyers know that their assets are very well protected and their money is safe and even when investing in off-plan property they know it will be finished due to the bank guarantees that are enforced by law.