It is no secret that the attractiveness of real estate funds has increased tenfold in recent years among investors. Their main interest is to invest in stone without the constraints of direct real estate. Since then, the coronavirus pandemic has passed through and has considerably changed the situation. Can we still consider today real estate funds as a safe haven, especially when they have a high level of indebtedness? Yes, but under certain conditions.
SCPI and FIA: two different strategies
Currently, there are two exclusively real estate vehicles: the Société Civile de Placement Immobilier (SCPI) and the Fonds d'Investissement Alternatif en Immobilier (FIA)1 . Their difference is not only limited to the investment strategy - concentration most of the time in a specific sector for one and geographic and sectoral diversification for the other2 - but also in their debt ratio.
As investors can exit at any time, SCPIs have a liquidity obligation. This is why their supervisory body, the Autorité des Marchés Financiers (AMF) in France, imposes a maximum debt ratio on them. "In the past, their bank debt did not exceed 15 or even 17% of the value of their assets," comments Sylvie Proia, Co-CEO and Partner at Unik Capital Solutions. "Today, this ceiling has risen to 40%. The new SCPIs were no longer able to compete with the older ones without resorting to more debt. The FIAs are not facing this problem. They control the fund's redemptions, constitute a pocket of liquidity and have no obligation to sell an asset"
Is debt a risk in the event of a downturn in the real estate market?
But if the cash flows generated by FIAs are higher than those generated by SCPIs, doesn't a high level of debt increase the risk of seeing capital devalued in the event of a turnaround in the real estate market? "Indeed, a portfolio can be substantially devalued when there is a vacancy in the real estate market, default by tenants and/or degradation of the direct environment. This devaluation will affect the investor's assets in the event of the sale of the assets", answers Sylvie Proia
How then to prevent the negative effects of indebtedness in the event of a downturn in the real estate market? It all depends on how the AIF has been structured. The risks of devaluation will be minimized if the fund managers respect real estate fundamentals - ideal locations, first-class tenants and long-term firm leases - and build a portfolio that is both geographically and sectorally diversified and not directly correlated to the financial and property markets.
"An intelligently structured, open and resilient AIF such as Cacik Fund allows its managers to choose when to arbitrate in the event of a market downturn and thus avoid devaluing their assets," Sylvie Proia continues. "Let's take the following example: suppose Cacik Fund's Spanish assets suffer a real estate market reversal. As the fund has a diversified approach and includes assets in several European countries, it will be possible to wait for the value of assets in Spain to return to a level close to that which prevailed before the crisis before proceeding with their arbitrage. »
1 The third type of real estate investment, the OCPI (Organisme de Placement Collectif en Immobilier), also holds securities as well as a pocket of liquidity (between 5 and 10%).
2 See our article "SCPI, OCPI, FIA: the best option to build the post-Coronavirus? »
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