Split-off SCPIs Under the Watchful Eye of the French Financial Markets Authority

Real estate assets continue to be closely monitored by the relevant authorities. In a report published on March 6, the French Financial Markets Authority (AMF) highlighted “numerous shortcomings” in the practices surrounding the sale of shares in structured real estate investment companies (SCPIs). 

This conclusion was reached following a series of targeted ("spot") inspections conducted between April and August 2023 at four credit institutions or investment firms authorized to provide investment services.

Split SCPIs differ from traditional yield-oriented SCPIs in that they offer a more discreet method of investing in real estate through securities. However, the AMF has noted that the specific characteristics of temporary property division are taken into account only to a very limited extent in the investment services offered for the purchase of SCPI shares.

The financial regulator emphasizes that this type of financial arrangement does not grant the same rights to the different types of owners. In fact, bare ownership shareholders own the property without deriving any income from it, while usufructuaries enjoy the use of the property, thereby receiving income—including dividends—but must also bear indirect costs such as management fees deducted from the rent collected.

The AMF noted that some of the four institutions it audited provided “insufficient or even inaccurate” information regarding the costs and expenses associated with these investments. In general, the institutions examined tend to rely excessively on the responsibility of their partner management companies, to the detriment of their clients’ protection and interests.

It is important to note that the division further reduces the already limited liquidity of SCPI shares held during the term of the division.

As the real estate sector undergoes a deep crisis, the decline in asset values is prompting individual investors to exercise caution and be more selective. By requiring management companies to update the appraised values of their real estate portfolios last July, the AMF has been encouraging market participants to be more transparent for several months now.

"Spot" inspections do not represent a position or recommendation by the AMF. However, they serve to send clear messages to financial market participants in Paris regarding practices that should be adopted or avoided.

The authority thus reiterated the rules governing the sale of SCPI shares on a split-ownership basis, adding that this particular investment structure, while meeting the specific needs of certain investors, adds complexity to an investment that already involves a complex financial instrument.

Temporary separation of ownership offers a discount on the purchase price of the shares, generally 20% for a 5-year separation period. This arrangement also offers tax advantages. During the separation period, the bare owner is not required to report property income or include the bare ownership in the taxable value for the IFI (real estate wealth tax) with respect to this investment.

Despite the AMF's warning, the strategy of splitting up SCPI holdings remains attractive to investors who are aware of its limitations. However, the downturn in the real estate market makes the prospects for capital gains uncertain.