SCPI: introduction to this product with high potential

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In France, a civil society of real estate investment (SCPI) is a structure of mutual investment.

The purpose of a civil society of real estate investment is the acquisition and management of a real estate professional. The management company takes care to collect money from individuals, find assets in which to invest, manage this estate and redistribute the rents and/or tax benefits to its unitholders, "associates".

In recent years the SCPI have gained popularity among french investors because of their high yields. Their remunerative rates has certainly declined over the last decade, but relatively less compared to other financial investments.

The SCPI is often called rock paper.

Form of the SCPI

After its creation by the founders, the SCPI establishes an information note by the financial markets authority who affixed his visa, allowing him to publicly call on savings.

There are two forms of SCPI:

SCPI in capital fixed

to achieve capital ceiling established by its statutes, the SCPI will successively open capital increases of a volume and duration be set by the management company. Its capital will make progress in fits and starts, and between two capital increases or when the ceiling is reached, the capital will remain fixed. Thus, if a partner wants out, it will take to find a buyer (or several) which would take (nt) shares in a way that the capital does not change.

SCPI open-end

at any time, the SCPI may issue new shares or redeem units to allow a partner to get out. Limits exist for the variation of its capital: a high limit, the capital ceiling, and a limit low Multicriteria. When a partner withdraws, the SCPI redeems his shares and it issues new shares to people who, at the same time, subscribe.

Values of the SCPI

There are different values in an SCPI:

  • nominal value
  • realizable value
  • market value
  • value of reconstruction

There are also different prices:

  • purchase price
  • withdrawal price

The face value is the value of the share during the creation of the SCPI. If you create an SCPI with 1 000 shares and a capital of €1,000, the nominal value of the share will be €1, but with time, the nominal value does not change, however the valorization of the SCPI is changing.

Purchase price = value nominal + bonus issue

The premium includes the upgrading of heritage, as well as the cost of purchasing:

The amortization of the costs of constitution, the costs of research and acquisition of real estate plus the underwriting commission.

Withdrawal price = value of the share – subscription fees, variable depending on each SCPI (10% on average)

Value = value of real estate, assessed by an expert

Realization value = value + other assets held by the SCPI (Treasury)

Replenishment value = value + estimate of fees generated by a possible reconstitution of its heritage

In short, what to remember:

The purchase price corresponds to the value of the assets + fees

The withdrawal price = purchase price – fees

The net return is calculated on the purchase price

Liability of carriers

By exception to the common law liability of the partners of civil society (i.e. unlimited), the vast majority of the SCPI provides responsibility for their unitholders to be limited to the single amount of their participation in the share capital of the company.

Example: The liability of the partners cannot be questioned if the SCPI has been previously and unsuccessfully pursued.
The liability of each partner to third parties is committed based on its share in the capital and is limited to the fraction of capital said he owns.

What are the benefits?

SCPI investment is worth about 5 percent a year to investors, which is much higher than many investments.

 

In summary, here is a list of the main:

  • Mutualisation of risks
  • Easy to buy
  • Low entry ticket
  • stable tenants (commercial lease)
  • No management to achieve
  • Interesting performance
  • Possible funding for a credit purchase
  • Possibility of reselling through the secondary market
  • Possibility to have full insurance SCPI

What are the disadvantages?

  • Resale of shares
  • Opacity of the valuation of the shares (accounting calculation)
  • Often high entrance fees (10%)
  • Stalled after at least 3 years
  • Limited secondary market
  • Valuation of shares, does not mean value of sale of shares
  • Investment sensitive to rising rates

 

 

The risk of the SCPI?

Lower prices on part of the SCPI

Good financial health of an SCPI is strongly linked to the real estate situation. It follows cycles of increase or decrease, which can encourage the SCPI to lower their share prices, which does not guarantee the capital originally invested. Fortunately, as long as you have shares, a capital loss will remain latent and will be at no real loss.

The investment horizon is a decade at least as it is generally advised.

Reduction in the dividends paid by the SCPI

A decline in rental income is another risk that may occur due to a decrease in the financial occupancy rate or a drop in rents paid by tenants. Management companies may however anticipate and counter a drop in performance, through the active sharing of own risk to the SCPI as well as by a real estate management.

Where a decrease in revenues is needed, managers will tend to lower the price of shares in the secondary market for the SCPI with fixed capital for example, so as to ensure a performance sufficient for new subscribers. These will see so a great opportunity for the acquisition of the shares but the elders will struggle to sell or will suffer a loss.

Failure of the Manager of the SCPI or the management company

The law provided for the possibility of a transfer of management. Indeed, in case of failure of the owner, responsible for management of the SCPI will be transferred to another structure approved by the AMF, even if this scenario remains very rare, especially on large structures.

The unitholders have a financial responsibility

The statutes and regulations of the SCPI, often stipulated that associates have a responsibility in its own right. However, it is limited to the amount of their contribution in the capital of the SCPI.

The simultaneous massive resale of shares by holders

There may be a risk if a lot of unitholders begin to resell their share at the same time (crash). The management company is obliged to resell the stock to repay holders of share.

The Supervisory Board and its responsibilities

The responsibility of supervisory board members is not null in law, despite the fact that this Council must refrain from any act of management. The necessary conditions for responsibility are difficult to meet, the nature of the risk associated with a corresponding investment in REITs as a real estate investment.

Lack of capital guarantee

The capital injected into an SCPI is not guaranteed. Despite the current success which they are subject, the SCPI are a savings product related to real estate cycles. Remember that between 1992 and 1998, real estate crisis, the value of the units was divided by two for most structures. However, at this time the AMF rules were not as strict and investors who had not sold eventually recovered that loss.

Investing in REITs is especially a long-term investment

Finally, there is no need to consider investing in REITs in the short term. It is necessary to wait a few years after the acquisition of shares to make the operation profitable resale. In most cases, it is advisable to keep full ownership of its shares a dozen years at a minimum, well we can become a beneficiary after 3 or 4 years.

SCPI and credit

Legally, an SCPI doesn't have the right to use the loan to finance its projects. Acquisitions must be completely covered by their capital, constituted by the contributions of the participants. However, an individual may subscribe to real estate credit to buy shares of REITs. The SIIC, on the contrary, may use the loan to acquire buildings, but this prohibits the holder to subscribe to a mortgage to finance the purchase of share.

Is this a good choice?

Yes the SCPI is overall a good choice for performance.

Other articles you may be interested:

http://richesse-et-finance.com/typologies-de-SCPI-SCPI-fiscales/

http://richesse-et-finance.com/SCPI-Calcul-de-limpot/

http://richesse-et-finance.com/SCPI-introduction/

http://richesse-et-finance.com/SCPI-introduction/SCPI-Societe-civile-de-placement-Immobilier

http://richesse-et-finance.com/SCPI-introduction/SCPI-FAQ

 

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