France: yields vs capital growth
Investors are split when it comes to property investment. Certain subscribe to high rental returns, whilst the other half, invest for the capital gain. As a general rule of thumb, there exists an inverse relationship between these viewpoints.
In central urban locations, such as Paris a stronger capital growth usually results in lower rental yields, as the rental index will vary at a different pace to capital appreciation, which is determined by supply & demand. Certain clients may argue that they need a high yield to help repay the mortgage, although this line of thinking (income driven) can lead to costly mistakes, as high yielding properties tend to be based on “cheap” properties in areas of slower economic recovery
What Yield should I be looking for?
Firstly, yields in New Build properties should not be compared to older resell properties. Today in France, the average yields for New Build properties are around 4%. This can increase to 5% in areas where the cost of land is cheaper, however in sought after areas around Paris for example, the average yield is between 3%-3.5% reducing to 2.5% in central Paris.
Property in Paris – A micro market!
The property market in Paris has come out of the “global crisis” unscathed and appears to be growing from strength to strength. This is the conclusion of the FNAIM in their latest figures published earlier this year. Historically, property in Paris has consistently shown to perform better than stocks and shares and most other financial products.
Advantages of New Build – for the owner & the tenant
New Builds will initially generate lower yields due to the cost of land and the costly building techniques. Today in France, the latest construction norm is BBC (Bâtiment de Basse Consommation) – low energy consuming developments = lower monthly costs.
A decennale – a 10 years builders guarantee, will help you quantify the costs of your investment over the next 10 years, something which is nearly impossible in older resell properties. This also offers peace of mind for the tenant and with the improved thermal and acoustic insulation, a more comfortable arrangement than older properties.