SCPI: A Hard Landing, but Positive Signs
The SCPI Observatory reports a sharp downturn but also positive signs for the market for real estate investment trusts (SCPI).
Since the beginning of 2024, the net asset values of SCPIs have fallen by 1.92%. The Office sector has been hit hardest, with an average decline of 5.23%, while other sectors have remained relatively stable.
The spread between the subscription price and the replacement value has narrowed to an average of -0.10%. While in recent years the market had shown a discount between the purchase price of SCPIs and the value of their assets, the figures are now nearly in balance. More than half of the products still offer a safety margin in the event of a decline in the real estate market, with a replacement value higher than the subscription price.
About 5% of the SCPIs tracked by the Observatory are likely to see their prices decline, with significant premiums exceeding 7%. These SCPIs are all in the Office category.
In the first half of 2024, gross inflows into SCPIs reached 2.3 billion euros, a volume comparable to that of the second half of 2023. The second quarter of 2024, however, saw a slight increase compared to the first quarter, with inflows of 1.2 billion euros. Although liquidity issues persist for several products, the volume of redemption orders decreased significantly quarter-over-quarter, falling from 625 million euros in the first quarter of 2024 to 412 million euros in the second quarter of 2024. Of this amount, three-quarters were offset by new subscriptions.
As of June 30, 2024, the value of shares awaiting redemption totaled 2.6 billion euros, representing 2.9% of the market capitalization. SCPIs without shares awaiting redemption accounted for the majority of new capital inflows, capturing 85% of all subscriptions in the second quarter of 2024.
From a sectoral perspective, the success of diversified SCPIs continues unabated: they accounted for 63% of new capital raised in Q2 (up 5 percentage points from Q1). Despite this turbulent market environment, 10 new SCPIs have already been launched since the start of the year (with more expected to follow), proof that market momentum is ideal for buyers. All of these new SCPIs are diversified, allowing them to take advantage of opportunities to invest at attractive prices.
The real estate portfolios of SCPIs continue to undergo a correction. Starting in 2025, SCPIs will be required to conduct a semiannual valuation of their assets, whereas until now this was done annually. Most management companies have already brought their valuations in line with market conditions this year, but since this valuation is not yet mandatory, we do not have data covering the entire scope (75 SCPIs are reported out of a total of 83 products).
With regard to the replacement values established as of June 30, 2024, we note an average decline of 1.92% over the first half of the year across the scope of this Observatory. Five SCPIs—representing 6% of the total—have increased their share price (as of the publication date), with an average increase of 1.16%. These are: Affinités Pierre (Groupama Gan REIM), Epsilon 360 (Epsicap), Kyaneos Pierre (Kyaneos), Cristal Rente (Inter Gestion), and Iroko Zen (Iroko). Seventeen SCPIs, representing 20% of the total, have lowered their unit prices since the beginning of the year, with an average decline of 11.74%. Of these 17 SCPIs, 9 had already lowered their unit prices in 2023.
Among them, 7 SCPIs have posted cumulative declines of 20% or more since 2023. The SCPIs with the largest market capitalizations have been hardest hit by these declines. Funds with a market capitalization exceeding 1 billion euros have declined by an average of 10.77%, compared with a decline of 2.24% for those with market capitalizations below 1 billion euros. This is because these SCPIs are often penalized by their large “portfolio” of properties acquired in the past.
The decline observed is not uniform across all categories and primarily affects funds invested in office properties (-5.23%). This trend was already noticeable last year, but it is much more pronounced this year. The other categories show relatively stable replacement values, with slight declines or even a slight increase for residential real estate investment trusts (SCPIs). The office sector has been hit the hardest: on average, share prices are trading at a premium of 1.50% above replacement values, despite the price declines that have occurred to date.
Beyond remote work and the commercial real estate decree—which requires building owners to reduce their buildings’ energy consumption by at least 40% by 2030—some properties are being penalized by rising vacancy rates and high debt ratios. Since the office market has not yet fully recovered, some assets are factoring in illiquidity discounts when valuing the assets of certain SCPIs. A few funds warrant close monitoring, as their share prices are well above the value of their assets. Finally, most of the SCPIs’ liquidity issues are concentrated in this sector.
We are seeing a slight decline in the Retail category (-0.88%), which nevertheless remains at an average discount of 0.84%. The sector does not raise any particular concerns at this point, but fund inflows remain low, and liquidity issues persist for certain SCPIs in this category, such as Patrimmo Commerce (Primonial), Aestiam Pierre Rendement (Aestiam), and Ficommerce (Fiducial Gérance). Here, too, we see a slight decline of 0.47% in the diversified SCPI category, but the discount of 1.08% remains reassuring.
This category accounts for the bulk of fundraising. It should be noted that all SCPIs launched since the beginning of the year are diversified SCPIs. The residential sector continues to demonstrate resilience. It is the only sector to show rising replacement values (+0.39%), with the highest average discount on the market (2.11%). Although the specialized category is down slightly overall (-0.46%), it does not raise any particular concerns. Healthcare and logistics continue to attract capital, while the hospitality sector is struggling.
Despite this widespread decline in values, SCPIs continue to trade, on average, at a 0.10% discount to their replacement values across all sectors. This means that investors are currently purchasing their shares at an average of 0.10% below the actual value of the properties held. As a reminder, this figure stood at 2.45% in our June 2023 Market Report (based on values as of the end of December 2022).
Of the SCPIs analyzed, 39—or 47% of the total—have a share price that is greater than or equal to their replacement value (compared with 25% last year). These are highlighted in red in the table in the appendix. Conversely, 53% of the total have a share price less than or equal to their replacement value. These are highlighted in green in the table.
Among these SCPIs, 92% have a discount of less than 5%. For 8% of them, the discount ranges from 5% to 7%. Finally, 13% of them have a discount of more than 7%, which amounts to 5 SCPIs. These are the most likely to see their share price rise in the short or medium term. They are highlighted in dark green in the table.
In conclusion, the SCPI market is undergoing profound changes. The decline in appraised values recorded over the first six months of the year has led to a situation where prices now more or less accurately reflect the value of the underlying assets, with an average discount of 0.10% relative to replacement cost values. Unsurprisingly, the office sector has been hit the hardest and accounts for the bulk of the problems related to falling share prices and liquidity. Nevertheless, there are some encouraging signs in the market.
Consequently, the macroeconomic environment is improving as a result of the cut in key interest rates that began in June. Further cuts are expected in the coming months. This could be detrimental to other savings products (savings accounts, euro-denominated funds, bonds, etc.) and allow SCPIs to regain, by comparison, a more attractive risk premium—especially since some 2024 distribution rates are expected to be very high. The market remains very dynamic on the supply side with the launch of numerous new SCPIs.
This proliferation of products raises several questions. In an already highly competitive market, how will all these new SCPIs—with relatively similar strategies—manage to differentiate themselves and find their target audience? Furthermore, this abundance of new offerings should not cause us to overlook older products, particularly those in financial distress. How will management companies resolve their liquidity issues? Under current regulations, various options are on the table: creating liquidity funds, merging with or being absorbed by other, healthier vehicles, or dissolution...
Finally, new provisions were introduced by Order No. 2024-662 of July 3, 2024. This ordinance provides for various improvements to the product: it allows SCPIs to invest in equipment necessary for the operation of properties and renewable energy production systems, which represents new sources of revenue and equipment that meets the growing demand for sustainability. It also requires the biannual publication of the value of their assets, which enhances the product’s transparency.
Finally, it eliminates the minimum nominal value for SCPI shares and introduces new categories of shares, in order to make this investment more accessible and better tailored to the needs of different types of investors.
Source: Pierre GARIN, Director of the Real Estate Division at Linxea, October 2024.
