The opening session of an International Property Series, which will cover a variety of jurisdictions over the next 6 months.
In this first session, we discussed the key tax, legal, wealth structuring and finance considerations for HNW clients investing in French Real Estate.
We were delighted to be joined by:
Hugh Wade-Jones - Managing Director, Enness, London. Hugh co-founded Enness Global Mortgages in August 2007 alongside Islay Robinson. Enness is the world's leading mortgage broker for High Net Worth Individuals borrowing across Europe and further afield.
Hugh is a widely regarded mortgage industry leader, described by The Financial Times as the 'go to mortgage broker of the super-rich'.
Frederic Mege - Director, Moores Rowland, Monaco. Frederic is a dual-qualified French and English private client lawyer (Avocat/Solicitor). He is a member of the Paris Bar Association, the Institut des Avocats Conseils Fiscaux (IACF), the Society for Tax and Estate Practitioners (STEP) and the Law Society (England & Wales). Frederic has many years of experience in advising private clients on personal tax and other legal issues.
Liam Wilkinson - Principal Representative of France, Enness, Monaco. Liam relocated to France almost eight years ago to play professional rugby - Stade Nicois (City of Nice). He then joined Enness in May 2018 with a key focus of being the go-to mortgage broker for HNW clients (non-resident) purchasing a property in France / Monaco, and for high loan to value mortgages.
Silvia Andriotto - Associate Director, JTC, Monaco. Silvia joined JTC in 2020 as Associate Director, having previously been responsible for the management of a Multi-Family Office in the Principality of Monaco. Throughout her career, Silvia has developed extensive experience in international corporate law, implementing cross-border instruments for multinational companies and (U)HNWI in multiple jurisdictions.
Silvia holds a master's degree in law and is also a qualified Trust and Estate Practitioner, as well as having a certification in Digital Strategy from University INSEAD, Singapore. She speaks three languages: Italian, English and French and has previously worked in several financial centres, including Luxembourg and Zurich.
In addition to lecturing in the fields of integration of law and technology, Silvia is also an active member of the European Law Institute - Special Interest Group - Digital Law.
Well, welcome to this discussion on French real estate. It's the first in a series that PCD is producing in partnership with Enness Group, we're looking forward to creating some great content over the months ahead sharing insight from some of the key European property markets. I'm joined by an expert panel here today covering all aspects of tax, legal, wealth structuring and financing of French real estate. But first of all, just to open up the discussion, I'm going to come to Hugh Wade-Jones, co-founder of Enness Group who provide financing for ultra-high net worth clients for property all around the world. Where do you see French real estate fitting into the global picture for luxury real estate?
To touch on the global position of real estate, there's undoubtedly been a slowdown in transactional numbers. And I think the reality of that, though, and probably what we've seen developing as a trend, even from maybe the first data that came out of the pandemic was that it’s more of an enforced slowdown rather than a lack of demand. I think we're still seeing huge demand, especially for top end real estate. And maybe going back one step to London, the focus is very much on luxury top end properties that are highly amenitised. People have to be in the centre of town, they want the swimming pool, they want the concierge, they want a bit of outside space, if possible. And certainly, a number of very top end developments in Mayfair, which are linked to the hotel chains, the Four Seasons residence in Grosvenor Square, the Mandarin Oriental in Hanover Square. These kinds of developments are very popular.
So real focus on luxury and top end, and possibly less of a focus necessarily on driving bargains, which is unusual, because obviously one would think now in a time of uncertainty, that would be what people are looking for safe opportunities. And there's been a lot of talk in the press about that “escape to the country”. It's a big boom. But at the top end, it's less of an escape down the M3 for a bit more garden space, and very much more international that people are looking at multiple foreign homes giving themselves various options should something similar to the pandemic happen again.
Very common areas we're seeing globally: the Balearics, especially Ibiza, St. Barts for the ultra high net worth community. And increasingly, we're seeing more and more in Portugal where properties that were worth 1 - 3 million are now potentially worth double that or even more.
And coming back round to what we're going to talk about today and what actually you asked is about French real estate and where that sits, and that very much always is front and centre of any high net worth or ultra high net worth property portfolio. And simply the reason for that is to some people, it's seen as a jewel in the crown. All the cliches that one can come up with - at the moment the French property market is a coiled spring where international buyers are very much looking to get back into France, start viewing properties and transacting. So it’s very, very busy at the moment in France.
Breaking that down then by region for international investors, where are the key hotspots for activity in deals and in financing? which are the hot areas that you seeW
In the most simplistic view I break it down into three parts. Obviously you have Paris – the Parisian market is still very robust. And I think what we're seeing there is a real array of international buyers that buy into Paris. Middle Eastern buyers have great affinity with Paris. The Americans with the “Midnight in Paris” romance are still looking to buy into it. And even the Asian market: Chinese buyers - not a lot but increased numbers - that we're seeing. And I think in Paris what we see is that demand is still outstripping supply. So prices are strong and activity is good.
The next area would be the Alps. An interesting one at the moment and a hard one to call in terms of transactional activity. But, certainly, from a lending perspective, I think a lot of banks are maybe overexposed to what we would class as Triple A resorts such as Courcheval. The banks are being a lot more bearish on their lending in those resorts, it's a bit trickier.
And then, obviously, the South of France, where I am based and where Enness have their office. The usual demand for the big trophies has low activity levels, but the banks are sitting on a lot of money at the moment there really is that kind of demand to get that cash out the door. Anywhere from Menton to Nice is very busy and even in Provence. And the borrowing opportunities are very good. The borrowing has never been cheaper. It sounds quite cliched, it's the same UK, but knock off three quarters to 1% of the rates in the UK and you get an idea of just how cheap it is to borrow here.
And in terms of Brexit, has there been any noticeable impact for you in terms of putting the financing together or just generally on the demand side?
I think we've completely forgotten about Brexit already. I think it's gone relatively unnoticed in the property market. I think, certainly down here, there's a big British presence and the pound is about 5 or 6% stronger than maybe even it was two or three months ago. And using the analogy of that coiled spring I have noticed huge numbers of potential buyers are looking to come down to view property. And I think it's maybe going a bit more holistically, I think it's a dream or a vision that people have had for years. But now actually, they probably realise time isn't on their side, that life is unpredictable. So I think we will see, maybe not the floodgates open exactly, but a very busy time.
As a bit of a counterbalance to all this positivity, this has been a strange period in the property and financial markets, and sitting in the background are those inflationary pressures that people talk about. But a property is one of the best hedges that you can have against deflation. So in a world where your cash in your bank is virtually worthless, any kind of asset that you can tangibly hold, live in has got to be good. So I think the news is positive. The borrowing conditions are very favourable in France, and it's still ultra-desirable for numerous reasons.
Okay, thank you. Well, just to bring in now, Frederic Mege of Moores Rowland, in Monaco. Welcome Frederic. Perhaps you could just give us a sense of the buying process and conveyancing for foreign investors looking to buy a residential property in France.
So in France, a purchase will need a notary to help with the acquisition process, the notary will actually make sure that the seller has got a good title, he will do checks on the property regarding the planning permissions etc. And something important to mention is that purchasers should be aware that they don't need to appoint the seller notary they can have their own notary to act for them because sometimes people don't know that. So as a buyer you can have your own notary acting only for you. I always advise my clients to have their own notary because it's better to have two separate notaries acting for both the buyer and the seller. Notaries in France don't usually give French tax advice or tax structuring advice so it's always good to have a lawyer involved too in the acquisition process.
And what are the tax considerations for someone intending to buy and reside in a property in France
So there are many taxes to consider – stamp duty obviously but there is nothing to do in terms of tax planning, capital gains tax, local taxes like the Taxe Fonciere and Taxe d’Habitation. Also income tax when the property generates income for instance. But the two main taxes to consider - the first one is the real estate wealth tax and the second one is the French inheritance tax. So let's look at these two taxes.
So the real estate wealth tax has been enforced since 2018 which replaced the previous general wealth tax. So the real estate wealth tax only applies to French real estate and is not used for the purposes of business activity. So, basically, an international client buying property in France will be subject to this tax if the net market value of the property exceeds 1.3 million euros. There are progressive rates so the tax can be quite high because the higher rate is 1.5% and applies for properties above 10 million euros. So it can be a very high tax liability but there are solutions to mitigate this tax. The first one, the most obvious, is to have a bank loan but now there are restrictions in respect of interest-only loans, which are not fully deductible. So there is a formula which actually gives the annual deductibility of the loan like a kind of annuity. And so, the first advice I would give clients is to consider maybe longer term loans, instead of short term loans to reduce the effect of the formula because we have to use a formula to determine the deductible annuity. Also maybe 3rd party loans so they could be deductible - there are some ways to a lower deductibility but they have to be granted on an arms-length basis. That’s an important point.
In addition to the financing there are other solutions to mitigate the real estate wealth tax liability. A simple solution is to consider splitting the ownership of the property and preferably splitting the ownership of the shares owning the property. Why? Because for the wealth tax liability we apply progressive rates. So the higher the value of the property, the higher the rate which will apply which will give higher tax liability. So if we have a property for family use and we split the ownership of the property between, say, five different taxpayers to give a value of 1 million for each taxpayer. Then 1 million will be below the threshold of 1.3 million euros. Just to give you an example of how that works. So the idea would be to involve your adult children in the acquisition. And the good thing is from a French tax perspective the adult children will be taxed separately. So often we advise clients to consider actually involving the children in the acquisition and also this helps with inheritance tax, obviously, on death.
The other tax to consider is indeed inheritance tax. In France, the progressive rates apply for transfers in the direct line. So first, obviously, to children so the rates are from 5 to 45%, and the rate of 45% applies for shares in an estate of more than 1.8 million euros. So the inheritance tax liability also can be quite high here. But the good thing in France is that death transfers between spouses are not taxed. Also there are solutions to mitigate the inheritance tax liability by using, again, a company properly structured with debt. That’s because the debt will reduce the value of the shares subject to French inheritance tax.
Another point to mention here is the use of Monegasque SCI (Société Civile Immobilière), because often people think about French SCI, but in Monaco, we also have Monegasque SCI. And a Monegasque SCI, instead of a French SCI will help to mitigate French inheritance tax. This is why they are often used by foreigners. I'm not going to explain in detail how it works, but remember you can consider a Monegasque SCI to buy a property in France.
Structuring an acquisition in France is quite simple. I will not advise a client to use an offshore company like a BVI company because then you are on two different tax regimes with corporation tax, it could be a nightmare. So we will use direct ownership but maybe sometimes the use of an SCI - French or Monegasque. Then in terms of structuring it is not very complex.
Do these considerations change for investment properties?
So in France, we distinguish between two tax treatments depending on whether the property is let furnished, or unfurnished. But the main principle is that it's always better, because it's more tax efficient, to let a property furnished like seasonal lettings. Why? Because you have a special regime which allows you to deduct 50% of the gross income as expenses. So for instance, if you receive every year a gross income of 50,000 euros, you will only be taxed on 25,000 euros. Also when you use an SCI, it's usually not advisable to do furnished lettings with an SCI because the SCI may become subject to French corporation tax and it's not good to have an SCI subject to French corporation tax for two main reasons.
The first one is that the free use of the property will generate a corporation tax liability on the deemed income and also capital gains tax will be calculated in accordance with the corporation tax rules which will require to use a depreciation and depreciation means the longer the SCI on the property, the higher would be the tax liability. But there are solutions to avoid this when you do furnished lettings with an SCI. The solution to avoid corporation tax is by doing the letting yourself as a shareholder. Again it is a bit complicated to explain this, but there are solutions.
Thanks, Frederic. And at what point would an owner occupier become French tax resident?
The main ownership of a French property doesn't trigger a potential risk of becoming a French tax resident. It's actually the use of the property which could be an issue. If for instance the property becomes the habitual home of the owner. Yes, it could be an issue but just owning in France a residential property as a second home doesn't usually trigger first tax residency issues.
Well, thanks for that Frederic. I just like to bring in Silvia Andriotto of JTC group in Monaco. So we heard from Frederic about some of the tax considerations. Perhaps you could give us a sense of how you might implement structures owning French real estate from Monaco.
A little bit of background when it comes to investing in France, and therefore buying a property or even building a new property there are not many vehicles you could consider to hold these properties. Normally the standard vehicle that is used to hold real estate is either an SCI (Société Civile Immobilière), or an SCP (Société Civile Patrimoniale). These types of companies are non-trading companies, are purely holding vehicles. But the difference between these types of vehicles and a standard holding company, such as a holding company in the UK, is that holding companies tend to own businesses whereas the SCI and SCP tend to hold assets. Assets that could span from real estate but not only that. In fact, a Société Civile Immobilière normally holds real estate, apartments, large properties. Société Civile Patrimoniale can also hold different types of assets such as equities in companies or bankable assets. These holding companies are actually very much used for foreign investors. So people not necessarily already living in France.
These types of companies have the advantage of being very discreet in the sense that the incorporation of these companies is not published in the famous Journal de Monaco (the standard way in Monaco for publishing any company that gets incorporated) so this is very anonymous. And also the shareholders of the company are anonymous, so you cannot actually know who the shareholders of the company are. And this is very much appreciated, especially in a broad scheme of wealth planning.
This type of company is pretty easily set up and it doesn't take more than two to three weeks. The advantage is also that you don't necessarily need to be resident in Monaco to get a company Incorporated. You could be resident in Switzerland, or resident in your country of origin and still incorporate a company in Monaco that holds French real estate. This company can be easily set up in Monaco or in France, but there are tax reasons why often clients decide to incorporate the company in Monaco. So incorporation is pretty simple: it doesn't take too much time and it doesn't incur a lot of costs. So we can definitely assist when it comes to clients wanting to have either a base or a second house or a third house in France. We are often asked to act when it comes to property purchases, especially in the south of France. So for instance Cannes, San Tropez, Villefranche, Roquebrune - dream areas for a lot of private clients.
What are some of the ongoing considerations once you've established your structure? As a corporate service provider, you're making filings, you're administering the structure, perhaps give us a sense of what ongoing role you might have when working with clients.
The company doesn't have a lot of requirements, but it definitely has to have an address in Monaco. You can domicile the company either at the Business Centre or, if the local authority agrees, you can also potentially domicile the company at your premises in Monaco, which is pretty peculiar. So you can have the company owning your real estate at your premises, but this is subject to authorization. So, as I said before, you don't need to be resident in Monaco but something else that you need to consider is that you want to have the accounting for the company. So you will need to call in an accountant able to run the accounting for the company and produce the financial statements once a year. These are, in a nutshell, the administrative implications of having an SCI.
We heard from you at the start that French real estate fits in the Premier League of global luxury property. From your base in Monaco is that what you see and have you noticed any trends in types of properties that people are buying or the nationalities of clients that are investing in the south coast of France?
People realise the importance of having a very comfortable place to live and where else in the world could you think about having a very comfortable house, maybe with a sea view, if not in the South of France? So I have to say that the market here in the south of France, for real estate, has a lot of interest from potential foreign investors from Switzerland, from Germany, from the UK, and from Russia. Russians, specifically, like the French Riviera, and they like Monaco, but they like the French Riviera a lot.
For instance, a client of our JTC private office division, with their family decided to relocate from the Ukraine to Switzerland. And we were able to relocate the entire family to Switzerland. The client in particular wanted also to set up his own business in Switzerland. So we assisted him from a corporate point of view, setting up his business in Switzerland. We assisted the family on the relocation to Switzerland, and we additionally offered a consolidation service, taking the full picture of his wealth into consideration and pulling everything into software that we offer to our private clients. So a balanced type of service to these private clients. But in particular, coming back to the point, he wanted to buy a property in Cannes. So he asked us to support him in the acquisition of the property in Cannes, but obviously, it was our job to incorporate afterwards, the SCI in Monaco for holding the real estate in Cannes. So if you like in the global picture of the wealth planning for the private client included also the incorporation of the Société Civile Immobilière to hold the French property. So this is, in a nutshell, an example we could give of assistance to private clients or any investors from abroad.
What do you find that first time foreign investors underestimate most about buying in France? What catches them out? I imagined the private office services more than simply the administration. It's about helping in any aspect of a client's life when they're very wealthy. So what is it that people underestimate? And how do you help them overcome some of these hurdles?
Our slogan at JTC is “time is the new luxury”. And clients often underestimate the amount of time that is required in order to set up things in the appropriate way in the particular jurisdiction in which you intend to do business. All the administration - all the time that is needed. So we do our best to successfully save time for our clients. So our added value is actually gaining them one of their most precious assets - their time. And if there is something that is underestimated about France specifically, it’s the tax burden, not only in terms of the amount of taxes, but in terms of the cumbersome procedure often required for the tax filing. And for all the tax reporting that is required in France.
Thank you, Silvia. Very, very helpful, and now to bring in Liam Wilkinson, who's the principal representative for France for Enness.
I would just second what Hugh mentioned earlier that the appetite for lending in France still remains strong. There's a very stable housing market down here in the South of France and we have historically low mortgage rates for residents and also non residents. I think I'd add one more point to what Hugh touched on earlier, there's certainly been in the South of France a movement in the last two or three years, where before it was very much a buyers market. So people from the UK or overseas, they would have quite a lot of power in negotiations, whereas now, it's moving more towards a seller's market whereby there’s a strong domestic demand. And that's been driven by the Parisians and Swiss clients entering into the markets and really driving prices. And so I think one of the key points for international clients looking to buy into France is to get pre-qualified, because you are no longer a strong client moving into the market. There’s a lot of competition and you want to have a strong indication of where you are, where you're at and how you stand. So I think that's one of the things that the agents are pushing with clients and how Enness Global Mortgages helps agents and introducers.
In terms of the mortgage markets, there's certainly been a change with French retail banks, in that they're now asking for a letter of high net worth, to even enter into a mortgage discussion, which would be defined as an income above £150,000 Sterling, or net assets of over £500,000. Sterling. Whenever I speak to clients, looking for a retail mortgage in the region of 80 to 85% with capital repayments that’s the first question we ask. And actually, because of that request now, it certainly narrows down the pool of buyers who would even get through the front door of the mortgage process. That’s not ideal at the moment with the poor current exchange rates. That's what the retail banks require and the next option that I'd look at if the client didn't fit with a retail bank, would be to go to a challenger bank.
A challenger bank best fits Enness Global mortgages. And that's because a high net worth individual, who might be a business owner, might not have the salary of £150,000, or they may have business assets, they may be quite early on in their trajectory of wealth. And they need to have that meeting with a banker and discuss how they can work together. And certainly, with the challenger banks they're more attractive than the retail banks. Most retail banks would give you a 25 year repayment mortgage at 2.3 - 2.4%, whereas I've closed deals in Paris, of 1.2%, fixed over 20 years. So, that's how we earn our stripes - we can put our finger on that.
Whenever I speak to clients and business introducers, we always say that the French retail banks are quite difficult to work with because they have such a narrow minded way of looking at underwriting the debt to income ratios, and require these high net worth statements. And we always suggest the smaller challenger banks, which might not be totally accessible to all other brokers, because they are quite niche. They’re subsidiaries of a large private bank. They're quite discreet. And I think that's how we add value in the process by having these connections and having our feet very much on the ground here in the south of France. So what I would say is there are still plenty of mortgage solutions out there. But be prepared.
And what are some of the common misconceptions for people who are just looking into the financing side for the first time?
The UK mortgage market is a sophisticated mortgage market that is very different to the European way of doing mortgages. For instance, a client finds an excellent rental property in the South of France - in Cannes or in Nice - that the agents have provided five years’ worth of rental income and if a client fits with that kind of profile, that kind of property in the UK normally passes with very little paperwork. Whereas over here there's very much an underwriting - it's a great property, great location but if that property is not rented how does your income and your debt actually work with this property?
The Bank of France actually brought in in 2020, as a means of slowing down the mortgage market, strict lending criteria, whereby you can only afford 33% of your disposable income to go towards a French mortgage. So if you look at the numbers it certainly makes it slightly more difficult when you have a buy-to-let property investor in the UK with 15-20 buy-to-lets and they come over to France, and they may have a low average income in the UK, but they use that UK mindset of, Okay, this is a great property investment opportunity. But when they go through the underwriting process with the French banks, they suddenly come up against the European way of underwriting the mortgage. And part of our job is to provide guidelines, also educate the clients on how it works. But also we can make suggestions on how we can make this work. So it's very much a complex matter but that's our job. We're here to help and provide those insights into the markets.
We heard from Sylvia about the international demand coming from all over the world, but particularly from Russia. I imagine that French retail banks might find it hard to assess and deal with international sophisticated clients that aren't domestically already based in France. So how as a broker might you help some of the international clients looking to buy in France?
We have high net worth clients looking to move down to the south of France on a second residency here, with any kind of property between 2 to 5 million euros they’re going to have global assets, and with Enness Global mortgages with our offices in London, Dubai, here in Monaco, Jersey, we have a very large panel of banks who are looking at clients, not just on the standalone French mortgage, but as a bigger picture. I think that's how, whenever we go into discussions with banks, we may say, we know that you have a lending capacity in the UK so this mortgage down in the south of France, at 60 - 70% loan to value position, between the two, it works. And I happen to think that when we then go into negotiations of rates and all these different things, we as a broker can say to the bank if you win the clients on this deal in the South of France, and you build that relationship, there's no reason why you then can’t look at other global assets of the clients in London, in Switzerland, or different jurisdictions which work with the bank.
And just to finish Liam, perhaps you could give us a couple of example transactions that you've got on your desk at the moment you're working on right now.
Sure. Down in the South of France we've completed several large mortgages, but also we're not shy to look around the 1 million euro marker. So, we're just completing a deal now in Saint-Jean-Cap-Ferrat. It’s very small Villa for that location and 985,000 euros, Finnish nationals, Swiss residents, who fit with the retail bank, salaried employees. Historically in the last 10 years, with a retail bank it ticks a lot of boxes, and relatively straightforward on the underwriting and so 985,000 purchase price and we got a 70% loan-to-value facility, interest only, 14 year fixed at 2.35%.
A client that we're working with now and should be closing very soon was very fitting with a French challenger bank. A French national, UK resident for the last five years, buy-to-let property in Paris at 1.5 million euros. They preferred capital repayments because the interest rate was so low, 0.95% fixed over 15 years. And the private bank financed 100% of the 1.5 million. And they requested 28% of assets under management.