After several years of continuous rise, the real estate market is faltering, held back by the rise in interest rates. However, the value of SCPI shares is directly correlated to the price of real estate. In the event of a bear market, should we expect the rock-paper to lose its value? Explanations.
Are we on the verge of a fall in real estate prices? The question has been agitating the media for several weeks, on the basis of the war in Ukraine, inflation 6.2% and soaring energy costs. However, the stone surprises. Because despite the clouds that are gathering, real estate is holding up.
At least for now. With potentially 1.1million real estate transactions records and a price increase of 5.6% on average over 1 year, 2022 should be an excellent year for French real estate, reveals the AVIV group (Best Agents & SeLoger Group) in the latest edition of its barometer published in mid-October.
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Real estate upheavals
However, the market is showing the first signs of a possible slowdown. At issue: the rise in rates from the European Central Bank (ECB), which retail banks are passing on to mortgage rates. Over one year, between October 2021 and October 2022, the average rates over 20 years have thus gone from 1.10% 2.30%.
Result? The production of real estate loans fell by 32.1% over a quarter, according to the October Crdit Logement observatory. And the number of transactions should decline by 15% in 2023 to return to under one million sales with 950000 transactions over the next twelve months, according to the AVIV group.
If these declines, which are currently limited, were to accelerate over the next few months, what would be the impact on the stone-paper market? Could civil real estate investment companies (SCPI) see the value of their shares drop? Not necessarily, replies Clément Renault, co-founder of the Louve Invest platform.
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The stone-paper remains solid
As a reminder, the subscription price for an SCPI unit is calculated from the recovery value. This is divided into two parts: the realization valuei.e. the value of the real estate held by the SCPI as well as its assets (cash, liquidities, etc.), and the reconstitution costs (notary fees, works…).
In theory, if real estate prices fall, the value of reconstitution decreases and the price of SCPI shares falls. But the reality is more complicated. Even if the real estate market becomes bearish over the next few months, the impact on the price of SCPI shares will be weak, if not non-existent, believes Clment Renault.
Firstly because if there is a drop, it will be slight, continues the leader of Louve Invest. But also because SCPI managers can set the price of a share within a range of plus or minus 10% recovery value. This is reassessed each year by an independent expert.
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15% beat
However, on the 60 SCPIs analyzed by Louve Invest, the average discount for the shares stands today 3.9%. The managers tend to underestimate the price of the shares a little to keep some margin in the event of a drop in property prices. This also allows them to play on the facial profitability of their SCPI, indicates Clément Renault.
In addition, the discount observed by Louve Invest was established on the basis of the reconstitution value for the fourth quarter of 2021. However, since this period, the price of housing has increased by 2.9% and that of the offices of 1.1%, according to INSEE. SCPI managers therefore benefit from a mechanical beat of approximately 5% (3.9% + 1.1%).
Even in the unlikely event that the fall in prices exceeds 5%the managers of SCPI would still have the 10% margin provided by law before being forced to pass on the fall in the price of the shares. This gives them a beat of about 15% in total, which is more than comfortable, observes Clment Renault.
SCPIs could even benefit from a period of falling prices. And for good reason: these companies invest mainly in cash. They are therefore little affected by the rise in credit rates. On a somewhat tense real estate market, this places SCPIs in a position of strength. Management companies will have real cards to play in terms of asset acquisition over the next 12 to 18 months. This will be felt on the yields of the coming years, wants to believe Clment Renault.
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