The French government have called investment in holiday complexes 'a risk', but reform proposals look weak.

As we have reported previously on these pages, investing in 'residence de tourisme' holiday complexes is widespread in France, but it is not without significant risk, a fact highlighted by the Covid crisis.

As a result of the pandemic, around 120,000 individual investors have not been receiving rental income on their investment.

Those buying into this type of investment purchase an apartment within a holiday complex. Often acquired newly built from a developer, the whole development is handed over to a management company who then enters into a commercial lease with individual apartment owners for a period of at least 9 years.

The sale particulars for the apartments will generally claim annual profits between 3% and 6% gross and while promotors may sometimes suggest that profitability is guaranteed, this is not the case. In addition, although these schemes may get a tax break, they are not government backed.

In recent years, several operators have gone bankrupt or faced severe financial difficulties.

Deprived of income due to Covid, major operators such as Pierre and Vacations, Belambra, Odalys, and Nemea have simply stopped paying rent to the investors.

As a result, some individual investors have found themselves in difficulty paying their mortgages, a risk that was not evident to them when they purchased the property.

When questioned recently by Le Figaro newspaper the Minister of the Economy Bruno Le Maire said he was "aware of the concern of the owners". He said that his services had worked to "facilitate discussions between landlords and operators of tourist residences, in order to reach a compromise that preserves the economic situation of residences and the rights of owner-investors."

However, the Minister also stated that "the state is not intended to be part of this private contractual relationship between managers and owners" with the Government preferring to favour "amicable settlements" of disputes.

These contracts entered into by individual investors are complex, but few investors will understand the technicalities, and the sale process will generally take place without any consideration of the commercial risks to the individual investor.

Yet the terms of the lease are potentially very burdensome. For example, some contracts make it clear that if the owners do not wish to renew the lease they must pay a lump sum to the operator, which may amount to 3 years of turnover. Sometimes the operator may withdraw from the development, but the owner must then manage the property themselves.

That can prove perilous from a tax point of view as they risk losing the 20% vat relief that is available when investing in these developments, provided it is operated commercially for at least 20 years.

The investors are, therefore, encouraged to renew the lease since this solution remains the simplest to implement. It also puts the operator in a strong position to reduce the rent.

While financial investments are subject to strict obligations in terms of information to investors, these real estate products currently have no constraints.

According to Bruno Le Maire, the rules need to change, saying: "A reform to improve pre-contract information for investors in tourist residence, to better warn of the risks associated with this type of investment, is currently under consideration. The objective of this reform project is motivated by the observation of the risky nature of the tourist residence investment, which requires objective information from investors, as well as the disclosure obligations provided for financial products."

Critics question whether that goes far enough, to the extent that the investment model itself is now under question.