Investing in Bare Ownership: Retirement Through Real Estate Capitalization

Among the options available today for saving for retirement through capital accumulation, investing in bare ownership offers a simplified and effective opportunity for French people, who remain fond of real estate and still view property as a safe haven.

For individuals, saving for retirement is, now more than ever, a priority. Developing a strategy to achieve this goal requires careful planning well in advance. While many financial solutions exist—such as the PER or traditional life insurance—it’s important not to overlook real estate retirement savings, as real estate remains one of the preferred wealth-building options for the French due to its long-term resilience.

From a long-term perspective—specifically that of retirement savings—investing in bare ownership is a real estate solution that offers numerous advantages. It is particularly attractive to taxpayers who face high tax rates during their working lives, as it allows them to build real estate assets without increasing their tax burden. It is therefore an excellent investment vehicle for building wealth.

The Principle of Investing in Bare Ownership

Investing in bare ownership is based on the principle of the division of ownership, which involves separating the full ownership of a property into two distinct real property rights: bare ownership and usufruct. The bare owner purchases only the structure of the property, without the right to use it or collect rent from it for the duration of the separation, while the usufructuary may use it as a residence (usus) or rent it out to receive the proceeds (fructus).

In exchange for not receiving rent for a period of 10, 15, or 20 years, the investor acquires the property at a discount of 30 to 50 percent below its market value as full ownership. The discount naturally depends on the duration of the division of ownership, during which the investor will not receive any rent (the longer this period, the greater the discount). Subsequently, the discount will automatically diminish over time until it reaches zero at the end of the division period, when the usufruct held by a third party expires and the investor becomes the full owner.

A growth investment

Investing in bare ownership therefore automatically appreciates in value through a capitalization effect, making it particularly well-suited for retirement savings. Throughout the duration of the split ownership arrangement, the investor receives no income and waits patiently. In the end, the investor is rewarded for this patience by acquiring a real estate asset that no longer carries a discount and has, moreover, appreciated in value due to inflation and growth in the real estate market.

Let’s look at an example. An investor purchases the bare ownership of a property—currently worth €250,000 in full ownership—for €150,000 as part of a 15-year split ownership arrangement. At the end of the 15 years, the property is worth €312,500 because the real estate market has grown by 1.5% per year over that period. The investor then sells the property and realizes a capital gain of €162,500 on an initial investment of €150,000. This represents a capitalized rate of return of 5% per year.
What better return could you ask for on your retirement savings, especially given the very low risk taken by the investor, considering they are investing in the real estate market?
 

Favorable Tax Treatment for This Real Estate Retirement Savings Plan

The icing on the cake of this real estate retirement savings plan is that it benefits from very favorable tax treatment regarding capital gains. In fact, the purchase price used by the tax authorities to calculate the capital gain is the initial value of the property in full ownership.
To return to our previous example, the tax authorities will therefore use €250,000 as the cost basis (rather than the purchase price of €150,000), and the capital gain will thus be deemed to be only €62,500.
 

Of course, the investor may also choose not to realize the capital gain and instead opt to rent out the property, depending on his or her financial and wealth management goals. The advantage in this case is that they can collect income corresponding to a rental yield on a property valued at €312,000… rather than €150,000, the amount invested 15 years earlier!
 

In short, as Dean Jean Aulagnier often says, investors in bare ownership “get rich while sitting back and doing nothing.” This is the very definition of the capitalization principle, which the French so desperately need to fund their retirement.

Source: Monetiva, a specialist in real estate financial engineering.