Open door for investors ?
Written by Professor Robert Anthony and Matt Anderson, Anthony & Cie
French Property News, September 2007
Is new French president Nicolas Sarkozy really a radical reformer? Anthony & Cie believes he will be less controversial than some fear.The election of Nicolas Sarkozy as President in May this year caused global interest in French affairs. Portrayed by his own party, and the media in general, as a market-friendly reformer who would break with interventionist traditions, Sarkozy’s first days in office have been closely watched.The President is viewed by those outside France as being a moderniser who is in favour of reforming the French economy and implementing market reforms. To many, talk of market reforms and opening the country up for business gives the impression that Sarkozy will bring in sweeping Thatcherite reforms.This is a misconception. The talk shows and phone-ins during the election were full of talk of Sarkozy’s reforms dividing the French, and causing social unrest; of a switch to an Anglo- Saxon economic model. What has been announced so far less controversial.
After the legislative elections the government announced that it would be introducing tax relief on mortgage interest payments. This will have a ceiling of 20% of the interest incurred on the loan, capped at a maximum sum per household, and for a limited duration. Couples qualify for a maximum of €1500 per year with a bonus of €100 for a child. Single people are entitled to €750 a year.
This move is designed to encourage those currently renting property to become owners. It also applies to homes bought since 7 May of this year, and will probably be expanded to renovation works also.While this move will no doubt be welcomed by those looking to purchase property in France with a mortgage, it is a gentle first step.
Further evidence of the President’s brand of market politics was shown during the EU conference in Brussels in June. Sakozy objected to the phrase “free and undistorted competition” going into the list of the EU’s guiding principles, to the horror of the UK Prime Minister-elect , Gordon Brown.Sakozy has also spoken frequently of the state’s duty to intervene economically to protect French jobs from being relocated abroad. Hardly the act of a radical free-marketeer.Indeed, Geoffroy Roux de Bezieux, president of Virgin Mobile France remarked : “He could be the impossible illegitimate child of Margaret Thatcher and De Gaulle”.
So what can property investors looking to work in, or already working in, France, expect from a Sarkozy administration?
The main pressure on the administration is to relax laws governing the banking sector.
French banking laws, that forbid over-lending by financial institutions, have resulted in France being one of the European nations with the least debt per capita, yet, critics say, they have starved the property market of vital oxygen. A lack of finance options for those without three years of accounts for their business, or who don’t have pay slips to show the bank manager, is something that investors hope to see President Sarkozy address.Many investors arrive in France, equity rich and income light (which is tax efficient), and find they cannot get a mortgage in France, whereas they would easily have qualified at home.
The last year has seen the emergence of some interesting solutions for property investors in France in the form of offshore equity release products. The bank takes a charge on the property and refinances up to 100 % of the value. A part of the value (up to 50%) is released to the client to put into their project. The balance that is not released to the client is placed in an investment portfolio (allowing for future estate planning) – the profile/strategy of which is determined by the client. Once the loan is approved the client can control how the released funds are used.
The difference between this and traditional French investor loans, is that with a French bank each stage is controlled by the bank, and funds are not released without the correct guarantees and completion certificates. Also with the offshore equity release option there is an optional two year interest holiday which allows the client to complete their project before the first payments are due (the loans are typically interest only). Loans are multi-currency and without exit penalties after two years. These solutions start at properties valued over €500,000.
Such solutions for investors have emerged within the marketplace over the last year, and will no doubt evolve in the future.
While Sarkozy has committed to making doing business in France easier and cheaper, there is no risk of France adopting an Anglo-Saxon model. Not only is the president forging his own ideological path, with its own distinctly French flavour, his hands are also tied by the national debt.
In theory the level of debt, agreed at EU levels, mean that cuts in capital gains or VAT on property, much sought by investors, would have to be counterbalanced by tax rises elsewhere. Not an easy sell. Indeed, his first few months in office has shown what a fine line he needs to work to bring about his reforms. Perhaps the president will need to work harder on his tightrope walking than his jogging!
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