© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
November 9, 2012 7:37 pm
Skiing, with its moguls, slaloms and schusses, is a sport with a distinct vocabulary. Ski-property, too, owns a term not heard in many other kinds of locations: sale-and-leaseback.
The concept exists across the world in selected developments but is most commonly found in the French Alps, where sale and leaseback schemes were first developed in the 1980s.
It was conceived when regional French tourist boards identified a shortage of tourist beds in ski resorts. Instead of encouraging more hotels – existing operators were anxious about losing business – planners instead gave incentives for the building of chalets and flats, often in areas that were not zoned for mainstream freehold residential properties.
Two French companies dominate the Alpine market – MGM and Pierre et Vacances – with several smaller agencies trailing behind. All operate broadly similar approaches, usually laid down by the local authorities that grant planning consent.
Buyers must enter commercial leasing deals, purchasing the freeholds of their homes but with the obligation to lease back the units to the developers or an approved management company, which lets them out for between 42 and 47 weeks annually. Owners receive a guaranteed fixed rental income – typically a small yield of 2-3 per cent – plus full tenancy management. They may use the accommodation themselves during the remaining weeks. All repairs and decorating are handled by the management company.
Terms vary: sometimes buyers must pay a service charge plus a taxe foncière for local utilities, while in other schemes these are borne by the developer. What is common to all S&L in the French Alps is that each property must be sold fully furnished, usually with a parking space, and the buyer is refunded the 19.6 per cent value added tax normally levied on mainstream new-build sales.
But there is one major proviso: if an S&L property is sold or no longer leased within 20 years, the VAT is paid by the purchaser on a pro rata basis. As most S&L sales are done with a contract for nine to 11 years of leasing, buyers are in effect obliged to renew their deal with the developer in order to optimise returns.
“It’s not for everyone, but over 20 years we have sold more than 50 developments in the French Alps, each with 35 to 200 units,” says Richard Deans, UK sales consultant for MGM. “S&L appeals to those who want a safe investment and a fully managed property with several weeks a year to enjoy the ski lifestyle themselves.”
MGM is selling new-build and off-plan leaseback units in 11 ski resorts across the Alps, at prices ranging from €190,000 to €450,000. Meanwhile, Erna Low Property is reselling leaseback apartments at one resort, Arc 1950, close to Les Arcs and managed by Pierre et Vacances, for between €160,000 and €900,000.
Not everyone backs the S&L concept, however. Knight Frank, which sells ski properties throughout the Alps – and holiday homes in the US and Caribbean, where a handful of other S&L schemes operate – decided in 2006 not to market sale and leaseback. “As a concept it’s entirely justifiable, but there are weaknesses that meant we couldn’t present it to our clients,” explains Matthew Hodder-Williams of Knight Frank’s Alpine team.
“Firstly, you have no idea who’s using an apartment, and many owners are uncomfortable with that. Secondly, if a scheme does not work well, or an operator goes bust, all the units in the development come to the market at the same time. Thirdly, many S&L schemes are in non-prime locations that suffer from a lack of tourists,” he says.
Swiss-based Alpine Homes International, which sells ski properties in the Alps in association with Savills, is also wary. “When S&L became well known 10 to 15 years ago, the properties were very cheap. It was tempting to buy something with VAT reimbursed. Then prices rose steeply, so the appeal of 20 per cent off meant rather less,” says Alpine Homes’ managing director Jeremy Rollason.
There is also the unknown quantity of the concept’s resale market. Owners who bought properties in the peak period for S&L – during the 1990s and first half of the 2000s – and have retained ownership since then to avoid VAT payment have not yet tried to sell. “When they do, they may be surprised. Resale value will be dependent on whether operators have reinvested and modernised, and whether resorts are still popular. Homes from good operators like MGM should be fine, but not all are like that,” warns Rollason.
This is refuted by François Marchand of Erna Low Property, which is selling 30 resale S&L apartments in the Alps. He claims those who bought off-plan just before the downturn – most of them Irish and British – would “resell now at about the same price”, and that it may be possible for some to achieve higher values if they “buy out” the leaseback element and repay the VAT. “This may cost, say, €25,000, but to sell without leaseback may mean a 15 to 20 per cent higher value than selling with the leaseback arrangement still in place.”
There is another challenge – buyers securing a mortgage. “Lenders regard it as higher risk because it’s very difficult to assess resale value. Lenders don’t want too much exposure on one development, [but] contracts run for set periods, usually nine or 11 years, so at the end a glut of properties could appear on sale that might lower the achievable sale price,” explains Miranda John of mortgage broker SPF Private Clients.
Notwithstanding such difficulties, variations of S&L may yet spread. Swiss authorities want to limit second-home ownership to 20 per cent of housing stock in some areas, and Austria is considering prohibiting ski resort second homes that are empty much of the year.
“My guess is both countries may effectively oblige developers to sell new ski homes with a leasing element to maximise use,” says Rollason. “But this time it will be a more sophisticated offer than we’ve seen so far under sale-and-leaseback.”
● Low-cost way of buying a fully-managed ski property
● No VAT payable and a modest guaranteed rental income
● Management firm usually handles ownership hassles, like maintenance
● Investment must last 20 years to optimise benefits
● S&L properties often not in prime locations
● Restrictions on how you can use your own investment
Please don't cut articles from FT.com and redistribute by email or post to the web.