S&L has adopted a new avatar
Sale and leaseback (S&L) has always been an interesting, if little-known, barometer of the real estate market.
Back in 2005 you could scarcely move for S&L schemes on mainland Europe, usually in secondary and sometimes poorly-infrastructured locations in France and Switzerland. Then the S&L model was adopted for some less well considered British schemes. Then, of course, they fell by the wayside in the downturn.
S&L schemes are aimed primarily at investors who want to enjoy their portfolios, rather than 'traditional' second home owners or 'traditional' investors who may never even see their properties. They work like this: you buy the freehold of a property with the proviso that, as owner, you use it for an agreed number of weeks annually – usually about six, spread out over the different seasons of the year.
This arrangement holds for the duration of the leaseback deal, typically nine to 11 years. For the rest of the time each year you 'lease back' the unit to the developer, or a management company acting on behalf of the developer. It is then rented out to holidaymakers and, in return, you receive a guaranteed rent, and the property and its furniture is maintained to a high standard for prospective tourist tenants.
So if the guaranteed rent is an average of 3.5 per cent per year, after an 11-year leaseback you will have recouped 38.5 per cent of your initial outlay – plus the 'free' accommodation of holidays you enjoyed there. Then you either keep the property, perhaps renewing the leaseback deal with the developer, or sell it on the open market.
To maximise the rental income for the developer, sale and leaseback properties are usually in high value locations with good infrastructures. This is also useful to you as a buyer, as it might well mean there will be high demand for your property should you choose to rent it out privately, or sell it, after the leaseback period.
Some S&L schemes were left high and dry in the downturn as the developer went bust. In some cases this has created chaotic situations with individual owners or varying nationalities unable to agree on setting up a local management body to handle rentals; in other cases, quite the reverse has happened as individual owners have banded together to take over the management, and very successfully too. With luck, buyers of the latest S&L schemes to come to the market will enjoy their nine to 11 years of leaseback without such dramas.
Two schemes of luxury homes – each with three or four bedrooms, a private pool and grounds – go on sale this month in France. One is near the coastal mecca of St Tropez, while the other is in the Luberon, a lush area of Provence. "A villa in the South of France usually costs £1 million (Dh5.76m) or more, but these sale and leaseback schemes are much less expensive," says Joanna Yellowlees, of agents Erna Low.
"A leaseback option might not be the most suitable buy for someone looking for a traditional family home with the flexibility and identity such ownership would bring. On the other hand, if you're looking for an investment opportunity without having to manage or maintain it yourself, then a leaseback property could be an ideal way for you to invest," says Patricia Fevrier of French property firm A Place in France. The 22 Erna Low properties in the Luberon are all three- and four- bedroom villas, each with a private pool and the security of a gated community. They cost from £454,800 to £594,800 and are little more than half an hour from Avignon airport and 90 minutes or less from Marseilles or Nimes. The guaranteed rental return varies from 3.5 per cent to 3.8 per cent.
The 25 villas near St Tropez are two-thirds of a mile from the coast at Cavalaire-sur-mer, between Lavandou and Sainte-Maxime, a two-hour drive from Nice airport. Prices range from £561,400 to £697,700 and again there are private pools and landscaped grounds within a private estate. The rental yield is 3.72 per cent.
"Early buyers for both schemes are French. They know the areas from their own holidays, but didn't believe they could afford houses there. Until now, apartments were the best you could get at these values," says Francois Marchand, of Erna Low.
What is interesting about these schemes is that they are better located than S&L in the past, and offer lower yields to deter mere speculators. In other words, they are more substantial schemes than we have seen before, seeking more serious buyers.
- The author is property correspondent of The Observer. The opinions expressed are his own
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