SCPI: Understanding the Internal Rate of Return

When investing in an SCPI, the distribution rate is often the first indicator investors look at. However, it provides only a partial view of an investment’s actual profitability. To measure an SCPI’s overall performance over several years, investors also rely on the internal rate of return (IRR).

This indicator takes into account not only distributed income but also changes in the price of shares. It thus provides a more comprehensive view of the performance of an indirect real estate investment, also known as “paper real estate.”

Key Takeaways 

• The internal rate of return (IRR) measures the overall performance of an SCPI over several years
• It takes into account both distributed income and changes in the price of the shares
• The IRR allows you to compare different SCPIs or other investments over the same time period
• IRR should always be analyzed in conjunction with other indicators, such as the payout ratio, the financial occupancy rate (FOR), and the quality of the portfolio.

What is the internal rate of return (IRR) for an SCPI?

The internal rate of return (IRR) is a financial metric that measures the annualized return on an investment over a given period. In the case of an SCPI, it includes:

• the initial investment amount;
• income distributed throughout the entire holding period;
• changes in the price of shares;
• the resale value at the end of the period under review.

The IRR is generally calculated over 5, 10, or 15 years. The longer the analysis period, the better it reflects an SCPI’s ability to create value over time.

Why is this important for SCPI investors?

The IRR provides a more comprehensive picture than the distribution rate alone. In fact, two SCPIs may have similar annual returns but show very different overall performance if one of them has regularly increased the price of its shares or, conversely, if the price has decreased.

The IRR thus allows for:

• to comparing several SCPIs over the same time period;
• to evaluate the overall performance of an investment;
• to compare SCPIs with other investments ( life insurance, bonds, stocks, rental real estate, etc.);
• to assess long-term value creation.

What information is needed to calculate the IRR of an SCPI?

‍Data Used in Calculating the Internal Rate of Return

The IRR is calculated by annualizing the total return earned during the period under review. The simplified formula takes into account the various cash flows:  

IRR = (Final Value + Income Received / Amount Invested)^( ^{1/n -} 1)

• n, where n is the number of years;
• the final value, which corresponds to the value of the shares upon resale;
• income received in the form of dividends distributed during the period.

Example of Calculating the IRR for an SCPI

Let’s look at a simple example to clarify this. An investor purchases €50,000 worth of SCPI shares. For 10 years, the investor receives €2,500 in income per year, for a total of €25,000 in distributed income. At the end of the 10-year holding period, the value of the investor’s shares has increased to €55,000.

Using the internal rate of return formula, the calculation is as follows:

(55,000 € + 25,000 €) ÷ 50,000 € = 1.6;

1.6^(1/10) = 1.0481;

1.0481 – 1 = 0.0481.

The 10-year IRR is therefore approximately 4.81% per year.

How should we interpret this?

Generally speaking, the higher the IRR, the stronger the SCPI’s overall past performance has been. However, it is essential to interpret this indicator with caution. Indeed, a high IRR may result from:

• a sharp rise in the price of shares;
• a regular distribution of income;
• a combination of these two factors.

Conversely, an attractive payout ratio can sometimes mask a decline in the value of the shares. In such cases, the IRR provides a more accurate picture of overall profitability. It is also recommended to compare IRRs over the same time period. Comparing a 5-year IRR with a 10-year IRR would not make much sense.

What factors influence an SCPI's IRR?

Changes in the Price of Shares

An increase in the unit price helps improve the IRR. Conversely, a decrease in the subscription price or redemption value can weigh on overall performance.

The level of distributed income

Regular dividends, derived from the rent collected by the SCPI from its tenants, directly contribute to the investment's profitability.

Length of Detention

SCPIs are designed for long-term investment. The longer they are held, the more the impact of the initial fees is diluted.

The SCPI's Investment Strategy

Sectoral or geographic diversification, the quality of the assets held, and the investment strategy pursued by the management company can also influence performance over several years.

TRI and Payout Ratio: What's the Difference?

These two indicators are complementary. The payout ratio, which replaced the former TDVM (payout ratio based on market value), measures the dividend yield over a one-year period. The IRR, on the other hand, provides a broader perspective since it also takes capital appreciation into account.

What other metrics should be analyzed in addition to the IRR?

IRR alone is not sufficient to evaluate an SCPI. Various other indicators are also worth examining:

• the financial occupancy rate (FOR);
• capitalization;
• retained earnings (RAN);
• geographic and sectoral diversification;
• the quality of the real estate portfolio;
• the management company's experience.

What mistakes should you avoid?

Be careful not to fall into the following traps:

• compare IRRs calculated over different time periods;
• focus solely on this indicator;
• forget that IRR measures past performance;
• ignoring the risk of capital loss;
• to overlook the importance of the SCPI's investment strategy.

Investing in SCPIs through a life insurance policy: an option worth considering

SCPIs may also be available as part of a life insurance policy. This solution allows for the inclusion of indirect real estate investments in a broader wealth management strategy. In particular, this approach allows for:

• to diversify one's savings;
• to benefit from the tax advantages of life insurance;
• to include SCPIs among other investment vehicles.

Depending on your wealth management goals and risk profile, the SCPIs offered by Raizers through a life insurance policy can be an attractive way to diversify your portfolio. To learn more and receive guidance on your wealth management strategy, please feel free to contact our teams.