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A SURGE in the popularity of second homes is set to follow the Chancellor's tax concessions unveiled this week. Anyone selling such a property after nine years will benefit from the new low rate of capital gains tax on the profits - only 18 per cent. According to Liam Bailey, Knight Frank's head of residential research, "this could have the effect of raising investment volumes - and hence underpin prices in investment and second-home locations".

Paris, which is already receiving a boost from the high-speed train link from St Pancras slarting next month, is set 10 be one of those locations. House prices in the French capital rose by 9.9 per cent last year. They are now slowing but the city is regaining its lost prestige, according to Gilles Oury, a Paris notary. "Paris has always attracted foreigners, but they stopped buying here in the 1980s and early 1990s," he says. "Now they're back."

Liz Wood and her husband, Lewis, are in the British vanguard. When they were looking for a second home recently, they wanted somewhere attractive. affordable and safe. Paris filled lhe bill: it was cheaper than London and more romantic than Eastern Europe. "The system in France is straightforward,' says Mrs Wood, 53, who is from Edinburgh. "I saw six flats in one day and really liked the last one. We made an offer, it was accepted and that was that."

The family now Owns a €600,000 (£400,000) appartement in the central 6th arrondissement near the chic Bon Marche department store and the no less luxurious Lutetia Hotel. 'We've just finished renovating it and we're really pleased,' says Mrs Wood. She is by no means alone. According to the Paris Chamber of Notaries, the proportion of flats in the French capital bought by foreigners rose from 5.2 per cent in 1996 to 8.2 per cent in 2006, The British represented 5 per cent of foreign purchasers ten years ago. Today they represent 10.8 per cent, having bought 279 Parisian properties over the past 12 months. Many are in well-known districts such as the Marais, but some are in less touristy parts of the city, such as the 14th arrondissements to the south, and the 111h to the east. In these areas, Britons tend to buy flats as an investment to rent out, often to students.

Marie-Pierre Saint-Martin, the director of London Paris Dream Home, a firm that provides a flat-hunting service for people looking to buy in the French capital, says her clients fall Into two categories. "There are those who want a pied-a-terre and those who want an investment," she says. "It's about half and half". The Woods, whose flat Mme Saint-Martin found, fall into the first category.

Declan O’Brien, on the other hand, has never stayed in the two studio flats he bought in 2004. “I’ve doubled my money and I’ve never been without a tenant,” says Mr O’Brien, 50, an NHS manager. He says a capital gains tax of 16 per cent for nonresidents from another EU country was an added bonus. “I could have invested in somewhere like Croatia, but Warren Buffett says never invest in a product you don’t understand.”

The standard lease for an unfurnished flat is three years, but includes clauses that can dissuade investors. Tenants can only be expelled before the end of the lease if the owner wants to move into the property – they cannot be expelled between November and March. Many of the Britons investing here opt instead for student rentals – furnished flats with a one-year lease.

John-Pierre Clark, the director of an internet property finder, Focus France, says that student flats costing €90,000 can bring in monthly rent of €600 a month. “The equivalent in London would be somewhere like Whitechapel,” he says. “But you would pay £200,000 and get rent of £800 a month.”

The other main attraction for British investors is the short-term rental market – for executives working in the city or tourists. Jean-Philippe Roux, of Knight Frank in Paris, says such flats can generate a revenue of €2,300 a week. “You’re essentially competing with hotels, so you must buy in the right area and the specifications must be high.” The cost of a flat destined for the short-term rental market is between €8,000 and €12,000 per sq m, and €20,000 per sq m in the Gold Triangle around the Champs Elysées, he says. The average price in Paris as a whole is €6,000 per sq m.

“We’ve noticed a sociological modification in certain areas, notably in the 6th arrondissement, where one flat in six belongs to nonresidents,” says Jean-Yves Mano, the head of housing at Paris City Council. “There’s been an impact on schools and businesses. Some foreign purchasers are welcome, the council says. But not so many that they drive away “les Parisiens”.

FACTFILE

59,734 flats were sold in the Paris region last year.

The average price of a flat in Paris has risen from €2,500 per sq m in 1996 to almost €5,900 per sq m in 2006.

The average flat bought by a foreigner in Paris measures 49 sq m.

The 4th arrondissement has the highest proportion of foreigner purchasers, while the 12th in the east has the lowest.

Contacts: parisdreamhome.com, focusfrance.net , flat-hunter.com, philiphawkes.com , parisaddress.com, francehomefinance.com

Posted April 27, 2008