While German open-ended funds have been regional and global players for decades, their French equivalents, the Societé Civile de Placement Immobilier (SCPI), have been more domestically focused. However, the recent strong comparative returns that the SCPIs have delivered has led to a surge in net inflows from French consumers, causing the largest funds to look further afield.
French consumers have generally preferred to invest in tax-efficient life insurance products, but reduced returns in the government bond, equity and life insurance markets has led to a huge rise in interest in the real estate funds represented by various SCPIs. Over the last decade, the average annual return on the CAC40 has been just under 3 per cent, compared with 10 per cent for the SCPIs, according to IEIF.
The recent surge in inflows to the SCPIs is spectacular: data from ASPIM shows that net inflows rose from €27.8bn in 2011 to €55.6bn in 2016, with the market capitalisation of these funds rising by €28bn over the last decade.
Typically, SCPIs have invested domestically, favouring small to medium-sized, prime, well-let offices in Paris and France’s key regional cities, but recently, with the sheer weight of equity to invest, they have started acquiring larger assets.
Savills analysis of the five largest SCPIs shows that, in 2012, 86 per cent of their purchases were in France. However, since 2016, their investment intentions have been challenged by the boom in fund inflows and the rising popularity of prime French real estate globally, putting downward pressure on prime office yields. We forecast that investment in French commercial real estate will reach a record €30bn in 2017, with more than a third of that from non-domestic investors, pushing yields down and making Paris the most expensive office market in Europe.
This has led to most major SCPIs to start investing outside France, with the majority focusing on markets such as Germany and the Netherlands. Savills analysis of their activity over the last 24 months shows that the overall volume invested by these funds has tripled since 2012, and the proportion invested internationally has risen from 14 to 36 per cent.
The type of assets that French funds typically look for abroad are quality buildings in major asset classes with strong fundamentals. They can’t compete for trophy buildings, but nor do they look to take any risk, particularly in new markets.
So, where do French funds go next? With prime yields compressing in mainland Europe’s best office markets they will begin to look further afield. The UK and Spain still look comparatively attractive in yield terms, but outside Europe these funds have been relatively inactive in the higher yielding North American markets. While investment returns in the UK and the US will be lower due to the costs of hedging the currency, the large and prime lots available in major British, Canadian and American markets may be too interesting to ignore.
Another challenge is the comparative returns from other asset classes. A gradual rise in government bond returns will definitely slow inflow into funds, as would a sharp recovery in the CAC40. The impact of this reweighting would be accentuated by declining returns from the SCPIs in the face of strong investor competition in major cities.
However, in the short to medium term, we expect inflows to remain healthy, driving further expansion of SCPIs across the Eurozone and possibly globally, and venturing into sectors beyond offices, where higher yield are available.
Read more: Savills Briefing European Investment