SCPI and Risks: What You Need to Know

‍Investing in an SCPI (Société Civile de Placement Immobilier) provides access to the real estate market without having to directly manage the properties. However, like any real estate investment, this investment involves risks that it is essential to understand before investing.

The main risks associated with an SCPI include capital loss, difficulties in reselling shares, a decline in rental income, and risks related to property management. These risks may result in a decrease in the value of the investment or in the dividends distributed.

According tothe French Financial Markets Authority (AMF), the capital invested in an SCPI is not guaranteed, and its value remains subject to fluctuations in the real estate market.

In a nutshell:

• The capital invested in SCPIs is not guaranteed: the price of shares may rise or fall.
• Selling shares can take time, especially when there are many withdrawal requests.
• Distributed income may vary depending on rental income, operating expenses, and property management.
• Debt and the concentration of investments in a single sector or geographic area can exacerbate certain risks.
• Diversification and the analysis of financial indicators allow for a better assessment of risks, though they do not eliminate them.

What are the main risks of investing in an SCPI?

The risk of capital loss and a decline in the price of shares

The primary risk associated with investing in an SCPI relates to the principal invested. An SCPI offers no capital guarantee: the value of its shares may rise or fall.

This trend depends, in particular, on the valuation of the real estate assets held by the SCPI. A downturn in the real estate market, a deterioration in the rental market, or a decline in the value of the properties may thus lead to a revision of the share price.

The investor may then suffer a capital loss, particularly if he or she sells the shares at a price lower than their purchase price.

Example: An investor purchases 10 shares of an SCPI at €200 each, for a total investment of €2,000. If the resale price drops to €170 per share, the total value of the investment becomes €1,700, representing a 15% decline, excluding any fees and income that may have been earned.

This hypothetical example illustrates the risk of a decline in value, regardless of any dividends that may have been paid during the holding period.

Please note: An SCPI’s past performance is not indicative of its future performance. Therefore, the distributed yield should not be the sole selection criterion.

Liquidity Risk When Reselling Shares

Unlike stocks listed on the stock exchange, SCPI shares cannot necessarily be resold immediately. The liquidity of an SCPI depends, in particular, on the availability of counterparties and market conditions.

The terms of withdrawal vary depending on how the SCPI operates:

• In a variable-capital SCPI, withdrawal requests are generally offset by new subscriptions. If there are not enough new subscribers, withdrawals may remain pending.
• In a fixed-capital SCPI, shares may be sold on a secondary market, provided a buyer can be found.

When there is a high volume of withdrawal requests, the time it takes to resell the assets may increase, with no guarantee regarding how long it will take to recover the funds or the price that will be obtained.

The AMF notes that a request to redeem SCPI shares may, under certain circumstances, take an indefinite amount of time to process.

SCPIs are therefore generally viewed as a long-term investment, rather than as a solution for savings that need to remain readily available.

Rental Risk and Declining Income

An SCPI's revenue comes primarily from the rent generated by the real estate properties it owns.

Several factors can affect this revenue:

• rental vacancy, when a property remains unoccupied;
• unpaid rent or financial difficulties experienced by certain tenants;
• the departure of a major tenant;
• renegotiating rents downward;
• the increase in operating and maintenance costs.

These situations can lead to a decrease in rental income and, consequently, a decrease in the dividends distributed to the partners.

The nature of the property also plays an important role. Offices, retail stores, logistics warehouses, healthcare facilities, and residential buildings do not share the same characteristics or pose the same risks.

To assess the rental risk of an SCPI, three factors deserve special attention:

• The financial occupancy rate (FOR): It provides information on the rental occupancy of the property portfolio from a financial perspective.
• Tenant diversification: This helps assess the SCPI's dependence on a few companies.
• Lease terms: These provide insight into the predictability of future rental income.

A high occupancy rate can be a positive indicator, but it does not guarantee stable rents or dividends.

Risk Associated with the Management Company

An SCPI is managed by a management company responsible for selecting real estate investments, managing assets and tenants, and making portfolio decisions.

The quality of management decisions directly influences the growth of the portfolio and the SCPI's performance.

Several factors, in particular, can affect the results:

• an acquisition strategy that is ill-suited to market conditions;
• an excessive concentration in certain assets or sectors;
• failure to properly anticipate renovation needs;
• real estate settlements reached under unfavorable conditions.

Before investing, it is therefore a good idea to review the management company's experience, its investment strategy, the composition of its portfolio, and its historical performance.

These factors provide insight into the strategy's consistency, without prejudging future performance.

The Risk of Debt and Interest Rates

Some SCPIs use loans to finance part of their real estate acquisitions.

Debt can help finance assets, but it also poses a risk.

If interest rates rise, the cost of new financing or variable-rate loans may increase. Furthermore, debt can amplify the impact of a decline in the value of real estate assets on net worth.

It is therefore important to examine the SCPI’s debt level, as well as the characteristics of its financing, particularly its maturity and the breakdown between fixed and variable rates.

The risk of geographic or sectoral concentration

Not all SCPIs offer the same level of diversification.

An SCPI with a heavy investment in office properties, for example, may be particularly sensitive to changes in that market. Similarly, a high degree of geographic concentration can increase its exposure to a local economic slowdown.

Conversely, diversifying across multiple real estate sectors and geographic areas can help limit dependence on any single market.

Diversification helps spread risk exposure, but it does not eliminate the risk of capital loss. Nor does it necessarily protect against a widespread decline in real estate markets.

How can you assess and mitigate the risks associated with an SCPI?

To assess the risks of an SCPI, it is essential not to focus solely on the distribution rate.

A high yield does not necessarily mean that an SCPI offers a better investment profile. It must be analyzed in light of the quality of the portfolio, the management strategy, the level of debt, and market conditions.

There are several indicators that can be used to assess an SCPI's financial position more accurately.

This information is included, in particular, in the regulatory documents and periodic publications of management companies.

Before investing, it is also important to review the Key Information Document (KID), which outlines, among other things, the risks associated with the investment, performance scenarios, and applicable fees.

Diversify your investments to better spread risk

Diversification is one of the main ways to mitigate certain risks associated with real estate investments.

It can take several forms:

• invest in SCPIs exposed to various real estate sectors;
• spread investments across several geographic regions;
• diversify management companies;
• Incorporate SCPIs into an asset allocation that includes other investment categories, based on one's investor profile.

This approach helps limit dependence on a specific asset or market. However, it does not guarantee the preservation of capital or the continuation of distributed income.

The investment horizon must also be appropriate. SCPIs are generally part of a long-term strategy and are not intended to meet an immediate need for liquidity.

Sources and Additional Information

• French Financial Markets Authority (AMF) — SCPI/OPCI: an unsecured investment subject to fluctuations in the real estate market.
• AMF — SCPI: A withdrawal request, even if it is in order, may take an indefinite amount of time to process.
• AMF — Key Information Document: Understanding Information on Investment Risk.

The information presented in this article is provided for educational purposes only and does not constitute personalized investment advice. Any investment in an SCPI carries a risk of capital loss and liquidity risk. Income is not guaranteed.