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)

Civil partnerships in France

Since December 2005 it has been possible for two people to enter into a 'pacte civile de solidarité' in France, governed by article 515-1 of the French Civil Code. This new arrangement can be suitable for same sex or male/female partnerships, and brings with it a number of advantages including savings on inheritance tax.

The procedures for entering into a PACS are relatively simple and require only a declaration by the two partners, two orignal copies of which are lodged with the civil court. A French 'notaire' or 'avocat' can help with the wording and offer advice as to how you can structure the partnership arrangements - for example in relation to property and other assets held by one or both partners.

The PACS continues to exist until amended (by filing a declaration at the court) or terminated by mutual agreement; by either partner wishing to end the PACS; in the case of marriage by one of the partners; and on the death of one of the partners.

Under amended inheritance laws, valuable savings can be made if one partner leaves his/her estate (property) to the other, where before inheritance tax was payable at 60%, the high rate for bequests outside the immediate family. It is essential to take formal legal advice, depending on your status as a French resident or not, before entering into a PACS.

Employed and self-employed in France

Many people who come to France to work or set up a business can easily find themselves lost in the country's byzantine bureaucracy, especially when faced with the complicated structure of tax and social security. Having been both employed and set up my own business, I offer a few survival tips born of practical experience.

Being employed
Being employed can be relatively simple and the main differences concern your type of employment contract, which can be either long term/indefinite (CDI) or comparatively short term/fixed (CDD), such as for the holiday season or to replace someone on maternity leave. The other choices are between full time (35 hours per week) or part-time (generally less than 20 hours).

When you get your payslip, you will see that there are around 12 or 15 different deductions for unemployment, social security, health and pension, paid partly by you but the major proportion by the employer, effectively adding a further 50% to the salary cost of employing you. The social security payments (known as 'cotisations') apply whether you are retired or already covered by insurance, and have to be regarded part of the cost you pay for the privilege of being employed and working. The burden on the employer is considerable and clearly a disincentive to employing any more staff than are absolutely necessary.

Income tax is payable by the employee annually, using a form that is not dissimilar to the British version. There are the usual 'personal allowances' or bands of tax free income, and certain expenses can be deducted such as travel-to-work costs, even by employees. If you are married, your tax rate is calculated per houshold rather than individually, with tapered reliefs for, for example, a non-working spouse, children of school age, parents who may be dependent and so on.

In terms of social security, benefits are fairly generous in terms of unemployment, sickness, maternity leave etc. If you become unemployed, you need to first register at your local combined job centre (known as a 'pole d'emploi') which will deal both with your benefit payments and helping you find your next job.

Self employment
Freelancing in France has never been particularly easy until the introduction of the new status of 'auto-entrepreneur' in January 2009. Still in its infancy, the system has been experiencing teething troubles, largely to do with the payment of social security contributions to your designated collection organisation (known as a 'caisse') which can vary according to the type of work you do. For example, most intellectual occupations, or liberal professions such as teaching or consultancy, come under a body known as CIPAV which has been found to be particularly inefficient. Artisans and crafts people have also experienced problems due to opposition by some trade associations, who claimed that the livelihoods of their members would be jeopardised by competition from 'unqualified' auto-entrepreneurs. Legislation requiring proof of competence has as a result been adjusted and comes into effect in January 2010.

Despite all these problems however, the new system had attracted nearly 200,000 registrations by the summer of 2009 and includes those already in jobs, unemployed, retired and those transfering from other tax and social security regimes. Relatively simple by French standards, auto-entrepreneurs pay a fixed percentage of turnover, combining tax and social security contributions, at a rate of 13% for commercial activities (turnover limit of 84,000 euros annually), and around 21% for services and liberal professions, with a turnover limit of 34,000 euros. VAT/TVA can be neither charged nor recovered, and if you exceed the annual turnover limits you are obliged to change to another regime. Note that the percentages charge are on total income invoiced, not on profit after allowable expenses.

The registration process is relatively simple and can be done online, as can any changes in your type of activity, or indeed if you decide to close your business. If however you have high business costs or need to register for VAT (for reasons of cost savings or higher sales margins, for example) then you need to consider one of the alternative regimes, where in some cases you can opt for either a system of fixed percentage of costs or one based on actual deductible costs. For these it is advisable to consult a French accountant.

Questions have been raised as to whether the auto-entrepreneur system can provide a backdoor route into France's social security system, typically in the case of British people moving to France who cannot get social security cover, as they are below the statutory retirement age and not in receipt of a British pension. One of the attractions of the auto-entrepreneur scheme is that tax and social security are only payable on actual (as opposed to notional turnover) which is not the case with some other more burdensome regimes. The question is still being debated and recent statistics seem to indicate that large numbers of auto-entrepreneurs are already in jobs or have a working spouse, or are retired and receiving a pension, and in many cases are simply following a part-time activity that will bring them some additional income at the end of the month.

The auto-entrepreneur scheme is open to everyone including non-French living in France. There is a lively discussion forum and links to other information sites on www.auto-entrepreneur.fr to which I sometimes contribute. The subject has also been debated in English on the www.totalfrance.com and www.livingfrance.com forums, particularly in relation to the social security implications.

The syndic pt 3

We have all now received a copy of the minutes of the meeting of the syndic (the building management company) held in July and known as the 'procès-verbal'. Few surprises, but some points of interest for other co-owners:

1. Ownership of the building's common parts is divided among the co-owners in proportion to the size of their apartment, and comprises a total of 100,000 shares, sometimes called 'tantièmes'. The bigger your apartment, the more shares you own. Just over half (53,100) of the share owners were present or represented by proxy, against 46,900 absentees. So any subsequent voting was based on the views of just half the apartment owners.....

2. Routine matters were dealt with first, such as approval of last year's accounts and the provisions for 2009/10. The only point of interest was that the syndic management company asked for a three-tear renewal of their contract but it was voted to renew it for just one year. The reason cited was the fact that the local firm we use has recently been taken over and the co-owners wished to adopt a 'wait and see' approach before approving a three year contract.

3. It was also decided to go ahead with the internal painting of the building - corridors, entrance hall, stairways etc. Two estimates were considered, one at 62,000euros and another at 52,000 euros, including laying new carpeting in the corridors. The lower estimate was approved, from a local firm. There will be a special call for funds in October, divided among the owners in proportion to their shares. My personal share will be about 550 euros.

4. As reported below, the co-owners also voted to instruct lawyers in the matter of the restaurants on the ground floor of the building, but with a limit of 2,000 euros. There will be a special call for funds in January 2010.

5. Proposals to set up a provisional fund against the cost of future building and maintenance works was outvoted unanimously.

6. Among the informal issues discussed was a decision to reduce the number of estate agents' For Sale and To Let signs on the outside of the building, and a reminder that dogs should be kept on a leash while in the building.

Altogether a typical, rather uneventful AGM which nonetheless lasted nearly three hours!

Permis de construire or déclaration des travaux?

Virtually all building works, involving either a new build or renovation, require the French equivalent of a building permit, or at least a notification of what work you intend to carry out. Applications are handled by your local Mairie, sometimes in conjunction with the regional office of the DDE who are responsible for overall town and country planning. In all cases it is advisable to consult them first, either in person or through an architect, as early discussions can give you an idea of what is or is not permissible, before commiting to any major expense.

Starting with the simplest, almost all interior work can be undertaken without any kind of planning permission, provided it does not alter the overall living area or affect the exterior of the building (such as creating new doors or windows). However, if you live in a co-ownership property, the rules of the 'syndic' (building management company) may affect what you can and cannot do, particularly if it affects load-bearing walls, the building's common parts, and exterior balconies or terraces. You will need to submit a request and plan to the annual general meeting of the co-owners for approval. The most common requests include joining two or more apartments to make a single unit, and glazing-in a balcony or loggia.

Exterior painting (known as 'ravalement') has to be carried out at regular intervals, according to local byelaws, and is subject to a prior declaration. There may be restrictions on colours and types of materials used. Permission must also be sought to erect scaffolding on a public path or highway, and to position a skip outside your home.

Works that are typically subject to a prior declaration include installing an open swimming pool, change of use that does not require major work, and small terraces not higher that 60 cms and/or less than 20 m²surface area. The declaration is lodged using a special form and the Mairie has one month to raise objections or propose modifications.

Closing-in your property with a wall or fence also requires prior declaration, and there may be limitations on height and the type of materials used, and restrictions or objections in relation to the public highway.

All other work will require a building permit, and the submission of a comprehensive dossier including plans, elevations and descriptions of the proposed construction. You are required to use an architect if the overall surface area is more than 170 m² - and frequently advisable in the case of smaller new builds or extensions.

The dossier is open for public inspection at the Mairie, where the planning department has a minimum of two months to reply (3 months if the archiect from 'batiments de France' has to be consulted, in the case of proposed works close to the site of a historic monument). Once issued, the building permit can be challenged by objectors (neighbours, conservation groups etc) during a further period of two months. As a result building works, even in straightforward cases, cannot start for a period of four or five months from initial submission.

Once construction starts, the Mairie must be notififed, and again on their completion, when a 'certificate of conformity' will be issued within 3 months, provided everyone is satisfied that the work has been completed in accordance with the original plan (subject to any alterations required).

It goes without saying that works that have been undertaken without the required permissions and approvals are subject to heavy sanctions and may in some cases be ordered to be pulled down.

Buying French property - transaction costs

There are certain fixed and unavoidable costs that have to be paid when you buy a typical French property. The main one - described somewhat inaccurately as the 'notaire's costs' - concerns a percentage of the property's sale price which is levied by the French government in land registration charges and taxes. The notaire's actual fees for completing the transaction are in reality quite low and controlled by the state. They are typically around 1% (plus VAT/TVA) of the purchase price, compared with the 6% - 7% government regisration charges and taxes.

These amounts are reduced in the case of new-build properties (on which VAT/TVA of 19.6% is included in the sale price). The property description will normally include the words 'frais notaire réduits'.

The total cost of buying a French property - notaire's fees plus government charges - can be estimated quite simply using standard tables, at the time of purchase and are clearly set out in the 'compromis de vente' or pre-contract.

Some notaires are licensed to act as property negotiators, in addition to their princiapl role as legal experts and tax collectors, and again their charges are quite modest at an average 2.5% (plus VAT) of the property sale price, probably less than a typical estate agent. They must hold a valid 'mandat de vente' for any property they are trying to sell.

French estate agents are licensed by the Prefecture and are free to set their own rates of commission (average 5% to 10% plus VAT of the sale price of the property), the amount generally reducing in proportion to the value of the sale. The agency's commission rates must be publicly displayed at the agent's offices and are clearly set out in the 'mandat de vente' which must be signed by the property's owner (the vendor) and the agent. The 'mandat' is a formal agreement between the owner and the agent allowing the latter to market the property in return for a percentage commission in the event of a sale.

Estate agents' commissions are normally paid by the vendor and are taken from the sale price of the property, which will be advertised as 'F A I', meaning inclusive of agency commission. The sum received by the vendor, after deduction of the commission payable to the agent, is known as the nett vendor price.

The other transaction costs - notaire's fees plus French government taxes - are paid by the buyer. Notaires will also charge a small extra fee for advising the buyer and drawing up the necessary documentation in connextion with matters such as a change of marriage regime, civil partnership (PACS), a power of attorney, or a French will, all matters which you may wish to organise at the same time as you buy your French property.

Spanish recession hits property sector

Some 400,000 Spanish companies hit by the recession have been forced to close during 2008, nearly 20% of them related to the construction industry, and causing a loss of 620,000 jobs and representing nearly 12% of the activity in this sector.

The only surprise is the speed with which this has happened, as the building sector was in full bloom until late in 2007, with heavy concentrations in popular tourist areas along the southern Mediterranean coast and Canary islands. With some 600,000 new dwellings coming onto the market annually, no-one paused to question whether demand would dry up. As a result many speculative new developments have failed to find buyers and lie half completed or empty.

Fortunately France has been able to weather the crisis, due to tradtionally cautious lending by the banks - loans are based on your ability to repay rather than the value of the property you are buying, and monthly repayments cannot exceed one-third of your disposable income. Although some projects have been put on hold, there is a continuing demand for new housing, based on projections over the next 15 years.