The French "buy to let" farce

[geckko]

My sticky nosing over at AAM tells me this outrageous scam is hitting the skids.

These so-called “buy-to-let” schemes were billed as a cash flow easy way to get into property. Of course the scandal is that this never really was a property play in the way it was sold, marketed, boosted and discussed among the chattering classes.

This was and is still a corporate bond, nothing more nothing less.

A French company raised capital to build some form of holiday camp. They raise the bulk of the capital by issuing bonds that paid some form of coupon, possibly “guarranteed”, but not necessarily. So it could have even been like a preference share.

In return the buyer of this bond was given security in the form of some of the camps assets (one of its huts, houses or whatever). It wasn’t yours as you had no or very strictly defined and limited rights of use. You had to let the company rent it out at the rent it decided (stc) and only get out if you could find some sucker to buy it off you on exactly the same terms.

The big con was that people were led to believe and aloud to believe that they “owned” a property, that they could get “capital gain” from it and make a tidy sum.

Of course, this was never the case. The value of these things was and will always by the discount value of the expected rental streams. The discount applied will be a function of the credit spread you would ant to put on these companies, which should have always been pretty high.

The scandal is mainly an Irish one. In France these things were set up on the back of tax advantages that to create a market for long duration fixed income investments for pensioners (with the avantage that the income should have some inflation linkage, being tied to holiday rental rates). Not safe as houses for a bond, but it would have its place.

Only in Ireland was this billed as “buying property”. And now people are looking at the massive hit because credit spreads have increased dramatically and the price of these bonds is badly eroded, even in those cases where they haven’t defaulted - in which case you will get a claim on your security - a house or hut in a holiday camp that is closed.

I would love to see this scam get a proper coverage in the media.

[2Pack]

There is an excellent Irish site which monitors both the Fraudsters and the Frauds in overseas property …unlike AAM where the fraudsters generally ramp the frauds and the sheeple get sucked in as sheeple do .

That site is overseascafe.blogspot.com/

Why not contact them and submit a piece on Euribor and spreads derived from the Euribor and how these can put a development underwater even if inbound cashflow is as predicted .

There is a moderately good explanation from an investors point of view as to why one leases in France but buys elsewhere

savills.co.uk/abroad/Content … =Leaseback

NO VAT is the main selling point

[karlos_the_jackal]

My sympathy levels for over-eager, under-informed Robo-Paddys are at an all time low. Nobody cares how this particular bunch of speculators lost their cash, they are just another brick in the wall. AAM is littered with textbook examples of bad ameteur investors.

• But the property over there is so cheap compared to here. 100k wouldnt buy you a cupboard here.
• I know a guy who knows a guy who made 100% return in 12 months flipping an apartment in dubai before it was even built.
• My Son/Grandson said I should invest in overseas property.
• The agent said the rent would cover the mortgage.
• No I didn’t actually go visit the resort before buying, but the website was very professional.
• But the rental is guaranteed for two years.
• I was told the russian’s were paying twice what we did, but I cant seem to find an agent to sell my apartment.
• I just wanted a pension for myself, whats greedy about that?

[geckko]

@2Pack

There is an excellent Irish site which monitors both the Fraudsters and the Frauds in overseas property …unlike AAM where the fraudsters generally ramp the frauds and the sheeple get sucked in as sheeple do .

That site is overseascafe.blogspot.com/

Why not contact them and submit a piece on Euribor and spreads derived from the Euribor and how these can put a development underwater even if inbound cashflow is as predicted .

There is a moderately good explanation from an investors point of view as to why one leases in France but buys elsewhere

savills.co.uk/abroad/Content … =Leaseback

NO VAT is the main selling point

I have seen a poster “overseascafe” perpetuating the myth of these schemes on AAM.

People shold be flat out told they are buying bonds.

[Septic_Crank]

@geckko

People shold be flat out told they are buying bonds.

More like a mandatory (usually 10 year) convertible bond. They may not be familiar with the terminology, but most understand that they are guaranteed a fixed annual rental income (bond coupon) with full ownership at the end of the period (the convertible bit). And they save on French VAT.

This is effectively what they are told. Do you think the use of arcane financial terminology would make any difference?

AFAIK if the bond defaults on its coupons they still have full convertibility.

[yoganmahew]

@Septic Crank

AFAIK if the bond defaults on its coupons they still have full convertibility.

Does this not depend where in the secured debt pile the bond is? If they are equivalent to preference shares, then they are not secured on the property, but rather secured on the health of the company selling the bonds, i.e. they are second in line for losses to common equity holders. If this is the case, then the overall health of the company becomes a big issue… not sure if this is the case, but clarity is surely required.

[geckko]

@Septic Crank

@geckko

People shold be flat out told they are buying bonds.

More like a mandatory (usually 10 year) convertible bond. They may not be familiar with the terminology, but most understand that they are guaranteed a fixed annual rental income (bond coupon) with full ownership at the end of the period (the convertible bit). And they save on French VAT.

This is effectively what they are told. Do you think the use of arcane financial terminology would make any difference?

AFAIK if the bond defaults on its coupons they still have full convertibility.

Most of the chat I have seen indicates these are more like consols. No maturity.

[2Pack]

But overseascafe are committed to educating their readers and would love an analysis of the underlying financial structure from an expert like you Geckko .

They are very very much the reputable end of overseas property …not the slime that rose in the boom .

Reputable overseas property agents and commentators will always be with us , and rightly so .

Look Here for example

[geckko]

@yoganmahew

@Septic Crank

AFAIK if the bond defaults on its coupons they still have full convertibility.

Does this not depend where in the secured debt pile the bond is? If they are equivalent to preference shares, then they are not secured on the property, but rather secured on the health of the company selling the bonds, i.e. they are second in line for losses to common equity holders. If this is the case, then the overall health of the company becomes a big issue… not sure if this is the case, but clarity is surely required.

I meant preference in the sense that you only get a conditional, fixed, coupon if earnings allow.

[yoganmahew]

@geckko

I meant preference in the sense that you only get a conditional, fixed, coupon if earnings allow.

Okay, so there is no danger that the property that underlies the bond is encumbered in any other way? (By more senior debt).

[verbatim]

@geckko

I would love to see this scam get a proper coverage in the media.

Ask, and ye shall not receive…

Are French sale and leasebacks still a good investment? - IT
irishtimes.com/newspaper/pro … 37517.html

An agent selling new schemes in south and eastern France says properly run leasebacks are a safe place to put your money

BUYING IN FRANCE: SELLING FOREIGN property post-credit crunch isn’t easy. And selling sale and leaseback properties – once all the rage with buyers looking for a possibly self-financing investment that might yield a few weeks in the sun or on ski slopes – has become even more challenging.

Reports of sale and leaseback companies that have gone out of business, leaving buyers with mortgages to pay and no rents to cover them, have made anyone still interested understandably wary.

Ciaran Mannion, the Irish agent of UK-based property company OverseasProperties.com, still maintains stoutly that French sale and leaseback properties are one of the few solid investments around.

(In a French sale and leaseback deal, the purchaser, on signing the deed of sale, gets the property free of 19.6 per cent VAT and enters into a separate commercial lease with a management company which rents out the property, giving an agreed rental income to the owner. The leases typically last from nine to 11 years, and are renewable automatically after that unless either party states otherwise.)

The word “guarantee” – used with abandon in overseas property brochures – really does still mean something when referring to French sale and leasebacks, says Mannion.

The emphasis, if you are interested in such a property, should be completely on the word “investment”, says the Galway-based agent, who studied business at Queens’s in Belfast and in France. “You have to do the math,” he says, and has detailed brochures spelling out in financial detail how a sale and leaseback can be a sound investment.

[Tbear]

The IT should have done a bit more homework (or alternatively just call that article a commercial feature if that’s what it is)

The Business Post offered a much more realistic view in Oct 08:

French leaseback operators feel the pressure

…Last year, however, a worrying trend started to appear, that of leaseback management operators running into financial difficulties. One of the biggest operators on the Alpine ski slopes, Transmontagne, folded last year, highlighting the difficulties that ski operators, in particular, have been encountering.

The experience of Transmontagne ™ clients has been traumatic. Along with receiving no rental income, investors were left with properties they couldn’t sell. Part of the TM portfolio is now being managed by another company called Maulin, but many former TM clients have still received no rental payments to date.

While the Transmontagne story sent tremors through the French property industry, there are now worrying signs that other operators could be heading for a similar situation, and not just ski-based management companies. ‘‘We are getting quite a number of people coming to us saying that they are not getting their rent from a number of rental companies in France,” said overseas property solicitor Tom McGrath.

One of the incentives in leaseback is that the French government refunds VAT of up to 19.6 per cent on the property price. But therein lies much of the problem with how this scheme is perceived. The French government involvement in returning the VAT means that the scheme is often seen by purchasers as a ‘safe bet’, and one which is vetted and guaranteed.

However, the French government has absolutely nothing to do with the scheme, after a project has been vetted and passed as a qualifying residence de tourisme product. Consequently it has not, to date, shown any great inclination to bail out privately run management companies that have run into trouble.

In fairness to most agents selling leaseback product, it was not generally promoted as a government-backed scheme, although the perception that it had such backing was often not fully corrected.

Once the property has been purchased the only contract is with the developer for the building of the property and the management company to run it for the duration of the agreement.

If a management company goes into liquidation, investors have virtually no protection from a legal standpoint, as most contracts protect the management companies rather than their clients.

For investors, not receiving their rental income can be just the beginning of their problems. When a leaseback operator becomes insolvent its former clients will be obliged to pay back, pro-rata, the VAT that was initially waived by the French government, since the properties no longer come under the auspices of the leaseback scheme…

archives.tcm.ie/businesspost/200 … y36581.asp

[OverseasCafe]

We’ve dealt with the issue of French Leasebacks before on the site, quite some time ago actually, so it might even be due an update.

overseascafe.com/OverseasDet … 85c5b5f428

Leasebacks and Buy to Let are two different things in France, the former aimed at increasing the number of holiday homes in the country and the second predominantly at French investors. I think from the tone of the thread it is the former that is being discussed.

The principle issue I would have with leaseback properties is not that anything’s being hidden, generally it is not, if people go into these thinking they are going to make a fortune then they plainly haven’t read any of the print, never mind the small print. They are holiday homes that return a little income, nothing more, nothing less. They are, in the main, freehold except that the contracts into which you’ve entered make them very inflexible freeholds. They generally don’t start to pay for themselves until after year 10 at the earliest.

The biggest problem is selling them. They are virtually unsaleable after purchase in my opinion. I’ve discussed this issue with many leaseback vendors, all of whom swear blind that they can, and are, being sold. When I ask for details of someone that’s sold one I’m stonewalled and have never actually been given a contact for anyone that has sold a leaseback property for a profit or otherwise.

I actually put a post on AAM about six weeks ago asking for anyone who had sold one, or even tried to sell one, to contact me, but still haven’t had a reply. So I’m guessing it’s not a well populated club.