SCPI: What are the prospects for 2023?

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The economic context (inflation, growth rates, etc.) changes the structure of the real estate market. But overall, SCPI managers remain optimistic about earnings. Provided you align your asset portfolios.

A product that continues to attract investors

As we approach the end of the year, asset management companies are generally posting good inflow numbers. SCPIs continue to advance (€1.2 billion inflows for Primonial REIM, same for La Française REM, €800 million for Perial, €600 million for Amundi Immobilier, etc.). “SCPI continues to be a sustainable part of the savings landscape,” notes Gregory Frapet, Chairman of the Board of Primonial REIM France. This trend also applies to SCIs. And overall, the results are in line with expectations. This indicates that distribution levels should be monitored.

Most distribution channel remains life insurance, for which convenience is a key factor. Mark Bertrand, CEO of Amundi Immobilier, emphasizes: “The less sophisticated the client, the higher the ratio with life insurance because it is easy to take out.”

Towards portfolio restructuring

Nevertheless, market participants have faced some hurdles over the past few months. Especially the changing office market.

Indeed, the post-Covid crisis trends have become clearer: a premium on centrality, quality of buildings and ESG. “Obviously, if we want to ensure income sustainability, we have to have buildings that match the demand,” continues Marc Bertrand. Admittedly, there is a sacrifice in terms of rates. But this was the likely choice of Amundi Immobilier’s investment policy. Therefore, the company preferred central buildings and dominated the most fragile areas of the portfolio, even if it had a slightly lower than average rate of return. The key question is clear: which buildings will be attractive enough for rent to outpace inflation over time?

This context leads managers to actively manage portfolios. Marc-Olivier Penin, managing director of La Française REM, says the company has doubled its arbitrage in 2022. Capital gains have been made and this capital has been reinvested in other opportunities.

Now the trend is to adopt more radical solutions. “We are at a tipping point with a certain third real estate obsolescence. The important thing is to know in advance the needs or, conversely, the areas that will collapse. We want to sell more immediately, whereas a few years ago we were waiting, trying to re-release and revive the legacy. There, we arbitrage in certain areas where we no longer believe in a third-tier future,” said Eric Cosserat, CEO of Perial. The goal is distribution above all else. Next year, this positioning will allow the combination of income distribution and capital income distribution.

On the other hand, Primonial REIM wants to wait for market conditions with new benchmarks before re-launching the capital. “After the summer, we are in a more selective reinvestment phase,” says Grégory Frapet of Primonial REIM. In addition, the company decided to withdraw its premises from arbitration. He thinks the shooting window is less good in the second half and therefore prefers to keep them running.

The end of leverage

A sharp rise in interest rates and low visibility on the trajectory is changing the funding landscape. “The leverage on the debts we have to renew is over. But it would be unwise not to pay the loans that cost 1% until the end,” says Mark Bertrand. Therefore, Amundi Immobilier will stagger the end of the leverage effect while continuing to observe the evolution of rates.

In practice, the purchase of a new building will be financed not by debt, but rather by money provided by depositors. “This is where SCPI is the perfect fit. For 10 years, we have offset lower rates, meaning higher real estate prices, by using inexpensive leverage to deliver the same rate of return to our clients. Today, financing no longer has an enabling effect on investment. Therefore, we need to find market opportunities that allow us to continue investing without reducing performance too much,” adds Gregory Frapet of Primonial REIM. Thus, the balance of resources will change significantly compared to what we have known in the past.

What are the implications for prices?

In 2022, we find an investment market in two stages. Purchases with leverage in the first half. It then disappears in the summer due to rising prices. “We were able to service 4.05% by buying buildings at 4% with 30% leverage at 1.50%. Today, to get the same 4.50%, you need to find a building with 5%. This will change investment policies,” notes Marc-Olivier Penin of La Française REM.

Market players agree on the end-of-year valuation trend in this market: measured declines in prices (-1% and -4%), but could be more significant if rental conditions are tighter. However, they generally plan to maintain the subscription prices of their SCPIs. “If the rates used by professionals decrease by 25 basis points, the 5% indexation of the rent allows to maintain the values. The whole challenge as a manager is to be able to pass the indexation of our rent to protect ourselves from this rate increase,” notes Gregory Frapet of Primonial. Thus, management companies believe that distributions should at least stagnate, and even increase on certain products.

Then there is the issue of liquidity. A few days ago, the giant Blackstone closed its real estate funds. A negative signal for SCPI? “This is a major risk, recognizes Perial’s Eric Cosserat. But now there is no liquidity subject because there is no crisis of confidence. There is trust between both tenants and depositors,” he assures.

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