Sunday Business Post 11.08

Safe bet turns bete noire
(November 2008)

Irish investors found security in the French leaseback system, but many are now being left out of pocket

Sarah and Tom White had no reason to be suspicious when they signed for a two-bedroom i apartment in Saint Cyprien, a tourist town in the Languedoc region of France. It came with guarantees. Under the French leaseback system, they would receive rental income of 4.8%, paid quarterly, and could holiday in their second home for a couple of weeks each year.

The scheme, popular with novice buyers such as the Whites, the retirement market and investors, often comes with guaranteed rental income of nine to 11 years and can be a comfort for those who want a second home without the hassle of managing it or replacing tenants. The Whites, and friends who bought in the same scheme, believed it would be plain sailing.

"We were told by the management company that rental income payments would be quarterly and were guaranteed," says Sarah White. "We had no reason to doubt this, so we bought in February last year. Sure enough, the first payment came three months later but since then we've seen no money."

Almost five quarterly payment dates have since passed without any cash from the management company. There has been no holiday either because the couple now have to cover two mortgages, one on the family home in Wexford, the other on the French property that was supposed to pay its own way. "We have reached the point where the only option is the legal route," says White.

The Whites are part of a growing number of Irish buyers facing an uncertain future over leaseback properties bought in France. Last month, almost 50 investors from Ireland sought legal advice in Paris over a holiday-home scheme in southwest France. The buyers say the property management company has not paid them rent on properties as part of a leaseback arrangement.

Property tax experts say there has been a notable rise in the number of litigation cases being brought against management companies. "Some investors are finding that the 4-5% guaranteed incomes they were promised are not coming through," says Colm Murphy, of Property Tax International in Dublin. "We have been told of scenarios where management companies had no experience in the market and properties were never rented out, while others were rented but the full rental income was not passed on."

France has long been the most popular place for overseas property purchases for Irish buyers. A well-developed rental market made the leaseback system attractive. Colin Murphy, of Someplace Else, a Dublin agency dealing in emerging markets, says: "Due to government tax incentives designed to increase the supply of quality holiday homes — leaseback schemes — the Irish and British snapped them up in their tens of thousands," says.

"These were considered very safe investments as it was assumed they were government-backed. As buyers are now finding out, they aren't government-backed and, with several large companies who manage the rental of these properties either going out of business or experiencing severe cash flow problems, the scheme has been turned on its head, with many investors receiving only a fraction, if any, of the income they previously thought guaranteed."

But agents selling leaseback schemes say buyers must do their homework first. Nick Leech, of Pierre & Vacances, France's largest leaseback company, says some clients were seduced by the guarantees of rental returns, which were often unrealistically high. "Some investors who ignored the two fundamental requirements for leaseback property investment — the experience of the company making the guarantee and the location of the property— are now experiencing problems," he says. "This industry is still very healthy as the majority of investors who buy these properties are French and think of them as long-term investments."

Inexperienced management companies charged with looking after these schemes can run into financial trouble, making it hard for owners to get out without losing money. "A concern among investors is the quality of rental income provided by management companies," says John Crawley, chief executive of Dublin-based Oui Can Do, which specialises in French property. "Some consolidation is starting to take place and I am confident that most of the companies with problems will work them through. Investors need to look closely however, at who exactly is guaranteeing their rental income."

This is little comfort to the Whites, who now face months battling it out in the courts instead of enjoying their second home. Tom McGrath, a Dublin-based solicitor whose firm specialises in overseas legal services, says he has been inundated with people who have encountered similar problems. "Many people have been promised guaranteed rent by agents who use this as an enticement to get the purchaser to sign and pay a deposit, so that they can in turn get their commission," he says. "The clear message is to be wary and take advice. Do not let your dream holiday home turn into a nightmare."

H Someplace Else, 1890425425, www.someplaceelse.ie; Oui Can Do, 012110780, www.ouicando.com; Pierre & Vacances Property Investments, 014830846, www.pierre-vacances.ie; Tom McGrath & Associates, 016610707, www.tmsolicitors.ie