Second home focus: France

France is one of the world’s most popular destinations for purchasers of second homes abroad, thanks to its landscapes, culture and quality of life. While domestic property sales appear to be on a downward trend, there’s no sign of a fall-off in interest from wealthy purchasers across Europe and further afield.

France has long been a favourite choice of country for individuals buying a second home abroad, for obvious reasons – its climate, landscapes, food and wine. There’s also the fact that it is easily accessible for most Europeans, especially residents of Luxembourg, as well as being popular with UK, US and Middle Eastern buyers.

Nevertheless, the number of transactions involving existing rather than newly-built property totalled nearly 1.12 million over the 12 months to the end of November, according to notaries’ professional body Notaires de France, down from 1.21 million in the year to August 2021.

The authors of the organisation’s January 2023 property market analysis report say the slowdown in transactions underway since the fourth quarter of 2021 deepened in the second half of 2022, indicating that a downward trend has replaced the explosion of sales – peaking at 23% year-on-year growth in August 2021 – that reflected pent-up demand following Covid-19 lockdowns.

BIL Head of WM lending Credit Structuring Catherine Bastien adds: “The epidemic context and the lockdown measures have redefined the requirements of buyers of high-end properties. Clients have turned to properties surrounded by green spaces, private mansions, villas and old houses that have been completely renovated. Luxury flats located in the city centre are nevertheless finding buyers when they offer roof terraces or large balconies”.

Return to price negotiation

However, the report finds that while sales volumes have started to fall, prices have not, either for existing apartments or houses, although a moderation of the growth rate was evident in the third quarter of 2022: “Notaries note the return of price negotiations, a sign of a softening of [price rises] and a more balanced environment for discussions between buyers and sellers.”

In the Paris region, prices of existing homes increased by 0.6% in the third quarter and were up 2% year on year, although there was a discrepancy between prices for houses (up 5.7%) and apartments (just 0.2%), a trend visible since the fourth quarter of 2020.

Outside Paris, the prices of existing homes increased by 1.8% in the third quarter of 2022, and were 8.1% higher than a year earlier, with houses up by 8.6% and apartments by 7.1%. Between the beginning of 2021 and the third quarter of 2022, the price rises of houses outside Paris have outpaced those of apartments, although it was the opposite in 2019 and 2020.

In recent years more Luxembourg residents buying property in France, because they can get there easily by car. But most big luxury homes are being acquired by customers from the Middle East and UK residents. Almost 50% of our mortgage loans are financing property in France.

The Paris region is the most prestigious region in France and it is also very sought-after by ultra-high net worth individuals.

Provence and Côte d’Azur still key markets

BIL Head of WM lending Credit Structuring Catherine Bastien says: “ the most popular destinations in the luxury real estate market remains the prestigious properties on the coast, while Paris is now competing with less urbanised areas and – for the first time in decades – has lost its hegemony to several provincial cities better able to offer a green environment.”

The prestigious suburbs of the Paris region are more than ever favoured by buyers of top-of-the-range properties. Attractive properties in the noble suburbs such as Neuilly-sur-Seine, Boulogne-Billancourt, Saint-Germain-en-Laye, Versailles or Saint-Cloud generally only remain on the market for a few days.

For upmarket buyers, Provence and the Côte d’Azur hold the greatest appeal, followed by the Basque area adjacent to Spain around Biarritz and Arcachon to the west of Bordeaux.

International buyers have returned to the luxury market after the disruption caused by the pandemic. Demand is coming from both French and international buyers and the proportion of international buyers has increased post-Covid-19. The clientele is a mixture of French as well as Americans and Europeans looking to buy a second home that they can rent out seasonally. Another trend is the return of ‘re-pats’ – French nationals who have lived abroad and want to resettle in the south of France due to the lifestyle it offers. Many head to Mougins and Valbonne, but also Aix-en-Provence due to their good international schools.

BIL Head of WM lending Credit Structuring Catherine Bastien adds: “we also have request from persons living in Paris who want to live closer to the sea, in places like Biarritz, St. Tropez and Cannes although we recently also notice a growing interest for Bretagne area. In Monaco it is mainly foreigners who want to live there for tax reasons. (French nationals do not benefit from Monaco’s absence of personal income tax)”.

Tax, fees and conveyancing costs

French rules allow anyone to buy a home there (with some restrictions) and the buying process is relatively straightforward. Once the buyer has found the house they like, they sign a pre-contract (compromis de vente) and pay 10% of the purchase price upfront. If they subsequently back out of the deal, they lose that deposit, except in very exceptional circumstances.

For new properties, the compromis will usually include a stipulation that planning permission must be granted. After the deal has been signed, the notary will investigate any legal, financial or other claims on the property. The final stage is the completion of the purchase (acte de vente).

The buyer will be liable for the notary’s conveyancing fees and property tax, amounting to between 7% and 8% of the purchase price for existing property; for new property the cost is around 2%, but the purchaser must also pay VAT at 20%. Estate agent’s commission can range from 2% to 5% and in some cases more.

Once they have completed the purchase, property owners are liable for the various housing taxes – land tax (taxe foncière), payable by everyone, and residence tax (taxe d’habitation), which is only applicable to second homes. These vary depending on where the property is located, its size, and the cost of local amenities.

Property and France’s wealth tax

France’s real estate wealth tax, introduced in 2018 to replace a broader-based tax on financial and other assets, applies to property worth €1.3m, net of borrowing, though there are allowances for a property used as a main home (French residents are assessed on their worldwide property assets, non-residents only on property in France). Property with a value above the threshold is subject to the tax according to a progressive schedule rising from 0.5% to 1.5% (applicable from more than €10m).

The taxation of rental profit depends on how a property is rented out, whether it is being offered for rent by a business or an individual, and whether it is let furnished or unfurnished.

The taxation of rental profit depends on how a property is rented out, whether it is being offered for rent by a business or an individual, and whether it is let furnished or unfurnished. When letting furnished property, the majority of people will use the so-called micro-BIC regime: a minimum tax rate of 20% (and up to 45%) is applied to 50% of the income (higher for registered furnished tourist accommodation or guest rooms), plus social security charges at a rate of 17.2% (7.5% for European residents).

Capital gains rules on the sale of property are complicated. Says Ms Bastien: “Purchasers in France must decide whether to buy in their own name or through a company. The taxation levied on the sale of the property will depend on the type of company involved. Individual owners of property in France can sell it completely free of tax after 30 years of ownership.

“Setting up a société civile immobilière or SCI is very popular among our clients. In most cases, the SCI is treated in the same way as an individual – it is free of tax after 30 years. With a private limited company (SARL), which is subject to corporate income tax, this exemption is not available. Tax is always payable on the capital gain, however long the property has been owned.”

Flexibility on loan types

If you need to borrow to buy in France (which can be useful to help stay under the property wealth tax threshold), domestic banks may not be particularly flexible. Many are unwilling to lend to non-residents, even for luxury property. Ms Bastien says international institutions such as BIL, which understand the tax framework for non-residents and are used to dealing with a wide range of nationalities, can offer an advantage.

International banks may be able to provide more flexible lending arrangements. Bullet loans – where a bank lends in anticipation of the borrower receiving a large lump sum payment in the future that will enable them to pay off the loan in full – are not readily available from French banks, but can be sourced from specialist lenders used to dealing with purchasers at the high end of the market.

French property has proved popular with international buyers throughout all market conditions, and buyers enjoy the comfort of a strong and predictable legal system, which minimises risk for would-be homeowners. BIL says demand for real estate in France remains higher among its clients than for any other region in Europe.