Apartment ownership scheme entices buyers to bare all

A new French property scheme is being offered to cash-rich UK investors looking for a secure long-term home for their money. Known as “bare ownership” – or “nue-propriété” in France – it has been part of the French property landscape for more than 200 years, but has not so far been promoted to foreign buyers.

Rather than appealing to investors seeking a holiday home across the Channel, bare ownership is a proposition for those who have at least €100,000 to invest for 15 to 17 years – and who are interested solely in capital uplift, rather than use of a property, during that time.

It takes its name from the legal distinction between “bare” ownership of a property and the right to use and benefit from it.

This distinction is one that French urban councils exploit to source additional housing. When a property developer seeks planning permission for a new scheme, a council may grant it in return for the use of a small number of units in the development on a fixed-term lease – typically of 15 years. The council can then let these units to top-end tenants: senior public-sector staff or company managers on secondment, for example. During that time, all maintenance costs, property taxes and related charges are the council’s responsibility.

Clearly, developers cannot sell these properties to buyers who want to live in them, or to landlords seeking rental income. So they seek investors who are prepared to forgo all use of the property for the term of the lease.

To make buying an unusable, unrentable property worth an investor’s while, the developer offers a discount of 40 to 50 per cent on the purchase price.

As François Marchand of Erna Low Property – which has just started to market the concept in the UK – explains, the discount amounts to “the equivalent of all updated rents, net of costs, taxes and charges, that the owner would have collected over the lease period if he or she had invested in full ownership”.

At the end of the lease, the council renovates the apartment and hands it back to the owner with full rights of usage. At this point, the owner has three options: become a landlord and rent the apartment out; live in the property; or sell it and pocket the profit.

Marchand outlines the following scenario: “If a property was for sale at €200,000, you would get a 40 per cent discount for bare ownership, so you’d pay €120,000. During the next 15 years, you would have no outgoings to pay on it. Assuming capital appreciation of 3 per cent a year, you’d be able to sell it after 15 years for €311,590 – a profit of €191,590, amounting to a 160 per cent return on your initial investment.”

For French taxpayers, the scheme is even more appealing because there’s no capital gains tax to pay after 15 years’ of ownership. In addition, bare ownership of a property is not liable to French wealth tax (ISF), which currently affects people with more than €1.3m of assets.

Even so, there are other factors to consider before opting for bare ownership.

● Costs: You need to budget for a discounted price of between €100,000 and €300,000 (though you could pay more). There is no rental income to cover mortgage interest costs, so bare ownership is typically most attractive to cash-rich individuals.

● Location: These schemes tend to operate in busy cities – Nice, Lyon, Toulouse, Paris – where business is thriving and demand for smart apartments to rent
or buy is well supported. That means the best bare ownership apartments are often quickly snapped
up by French buyers.

● Early access: You can sell before the 15 years is up but, as the lease will not have expired, you will only be selling the bare ownership – so the price will be based on the discounted price you paid, rather than the full market value.

● Risk: The most obvious risk is that the property market fails to rise. But it is unlikely that there would be no growth over a 15-year period, and even more unlikely that prices would fall by more than the 40 per cent initial discount.

The official notary website – www. paris.notaires.fr – reports capital appreciation of around 30 per cent over the past five years for apartments in Paris, even during a European property downturn.

A more realistic risk is the opportunity cost: you could have put your money into a more lucrative investment. But you would probably have to accept more risk if you did. In relative terms, bare ownership is likely to be a lower-risk asset, as there is little danger of a French council going bankrupt and defaulting on its obligations.

● Tax: Martin Rimmer, tax manager at consultants the Fry Group, explains that the double taxation agreement between the UK and France means UK taxpayers may be liable to capital gains tax (CGT) at 18 or 28 per cent in the UK if they sell.

But if owners can occupy the property as a main residence for a while, some CGT relief can be accrued. ● Alternatives: Anyone considering an investment in French property can enter leaseback schemes, where investors buy apartments in tourist areas that are then leased to a management company for short-term holiday lets. Leaseback enables investors to buy new apartments at a discount to market value through the refund of VAT at 19.6 per cent. But while bare ownership is an investment based on pure capital appreciation, leaseback allows the option of a certain number of weeks’ use each year, plus a guaranteed annual rental return.