Wednesday, September 2, 2009

Buy to let - plenty of choice, but proceed with care

Buying a property to let can be an attractive proposition but like all propety buying, you need to proceed with caution. Gone are the days however when yields of 10% or more were possible, and although French property prices are coming down in some areas, so are the rents that tenants are prepared to pay. There is still a gap between the average cost of monthly mortgage repayments and the cost of renting, and it is unlikely that rental income will totally subsidize a mortgage - if that were the case, renters would themselves become buyers. Even with a gross yield of 4.5 to 5 per cent today, repairs and maintenance, property management fees, taxes and the occasional month without a tenant can substantially reduce this figure. Is it worth thinking of buying a property purely for letting?

Yes and No. Within Pyrenées-Orientales (66) there is certainly a wide choice not only of suitable properties but also a number of different rental markets that can be exploited. The largest and most obvious of these is the summer rental market, where during the high season weekly rental rates can be multiplied by four times the monthly figure charged outside the most popular six weeks holiday period, from early July to the end of August.

Competition however can be fierce, and the main holiday resorts have an exceptionally high percentage of second homes - 60% in Canet, 71% in St Cyprien, 72% in Argelès-sur-mer and 66% in Collioure. The bulk of properties (principal plus second homes) comprise individual houses, ranging from 60% in Canet and St Cyprien, 65% in Argelès and just over 50% in Collioure. Of the remainder, just a tiny percentage (3 - 5%) of the housing stock comprises studios, and the largest category (around 50%) is made up of three and four room dwellings, while the percentage of two-room (apartment) properties is under 20%.

Curiously, the departmental capital Perpignan presents a number of surpising contrasts, considering the high number of students (8,000) attending the local university and the needs of the young working population for affordable housing. Of the overall housing stock, 65% comprises individual houses and 33% apartments, with a high percentage of owner/occupiers (61%) and principal residences 75%, and 34% renters. Less than 3% of Perpignan's apartments are classified as studios, and the largest category (60%) is made up of houses and apartments of three rooms or more, reflecting the high rates of owner/occupation by married couples and families. Thirty per cent of homes have five or more rooms, representing part of the hidden wealth of this area, otherwise better known for its high levels of unemployment and emphasis on tourism and seasonal work.

In terms of purchase price versus potential rental income, Perpignan has some of the region's lowest property prices averaging 2,000 euros per m² and a 100,000 euro studio or small two-room apartment could be rented out for 350 - 450 euros per month, againts average monthly mortgage repayments over 20 years of just under 1,000 euros.

Property prices tend to rise on the Mediterranean coast, and in the resorts of Canet, St Cyprien and Argelès they are closer to 3,000 per m² rising to 4,000 euros per m² around the yacht marinas in St Cyprien and Port-Argelès. In the histoic village of Collioure some property prices have even touched 6,000 euros per m² in recent years.

The coastal resort towns are not especially attractive to long-term renters (students and workers) because of the lack of accessible transport. Many jobs are centered around Perpignan but away from the town centre and concentrated in the many industrial and commercial business parks that surround the town. Not surpisingly the region has a high level of car ownership - 51% of households owning at least one vehicle and 29% two or more.

What then of the arithmetic? Although some property prices rose dramatically - albeit from a very low base compared with the UK and Ireland - after 2002, they have since stabilised and in some cases fallen by a possible 5 or 10 per cent. Owners who bought pre-2000 are probably still enjoying a steady income from renting and as they approach 15 years of ownership can look forward to selling their property without having to pay capital gains tax (which reduces by 10% per year of ownership after the first five years, on second homes).

Several of the more recent developments on the Mediterranean coast date from the start of the 1990s and have reached their 15 year life. I have noticed an increase in agents' For Sale boards partly as a result of the original owners cashing-in on their investment, and also a sign that the 'crisis' is obliging some owners to generate some ready cash. As a result, there is currently a wider choice of available properties compared with 2008. Bargains are still rare however and prices are unlikely to fall back to their pre-2000 levels. But it is almost always possible to negotiate a modest reduction in the asking price, and if you are prepared to look long term, your French rental property can still represent a sound finacial investment.

(Figures quoted from Benchmark Group, Le Journal du Management)