One of the strongest and best performing investment products in France are French property investment funds, called Sociétés civiles de placement immobilier (SCPI).

What is a Société civile de placement immobilier (SCPI)?

SCPIs are investment companies authorised to issue shares to institutions and the public, and set up with the exclusive purpose of buying and managing property on behalf of the shareholders.

An SCPI needs to be distinguished from a Société Civile Immobilière (SCI), with which readers may be more familiar. The latter is merely a limited company that can be used for the purchase and ownership of French property.

The nearest equivalents outside of France to an SCPI are 'Real Estate Investment Trusts (REITs)'.

In the UK REITS have been around for less than a decade, and they are used primarily by large quoted property companies as tax efficient legal vehicles through which to manage their portfolio.

By contrast, SCPIs have been authorised by law in France since 1970, and under French law they are not able to be quoted on the French stock exchange. They are also used more widely as vehicles for new property investment.

There are now around 200 SCPIs in existence, with the largest having 100 or more properties in their portfolio. Notably amongst such SCPIs, each with a capitalisation in excess of €1 billion, are Accès Valeur Pierre, Crédit Mutuel Pierre 1, Edissimmo, Elysées Pierre, Immorente, Selectinvest 1, Notapierre and Rivoli Avenir Patrimoine.

The companies are managed by a professional management team (société de gestion) who collect the funds invested and undertake the acquisition, construction and management of the properties.

Returns

In recent years the funds have seen significant growth, rising from around €18 billion of capitalisation in 2009 to manage around €29 billion worth of funds today.

The returns have been well in excess of most other forms of investment averaging over 5% gross pa during the past twenty years.

Their income comes from the rents that are charged to tenants, which is then paid out to shareholders in dividends, normally on a quarterly basis, pro-rate to the number of shares held.

The strength of the returns comes from the fact that the vast majority of funds are invested in commercial and industrial property, mainly around Paris and the Ile de France, but also in some of the other major cities of France.

The portfolio comprises prime offices occupied by governmental and other public sector bodies or large quoted companies, but will also include a large amount of more risky and low yielding properties let to medium sized companies.

Investing in an SCPI gives an investor access to this market, and the mutualisation of risk, where they might otherwise be obliged to purchase an apartment or other residential property for letting purposes.

A small number of SCPIs are set up with the specific purpose of investing in residential property, under tax break regimes such as 'Scellier' 'Malraux' and, most recently, 'Duflot'. Residential SCPIs are primarily set up to reduce tax liability, not necessarily for the return they earn.

Those SCPIs whose primary focus is on the dividends they pay are called SCPI de rendement, and are likely to be the ones of interest to most expatriates.

SCPIs are authorised and supervised by the French financial regulatory authority, the Autorité des marchés financiers (AMF).

Although the track record of SCPIs may speak for itself the capital invested in an SCPI is not guaranteed, and neither are the returns.

Tax Status

SCPIs are ‘fiscally transparent’ and that being the case they are not subject to corporation tax.

Instead, each shareholder is taxed on their basis of their own individual circumstances.

Accordingly, as an individual investor you would be liable to taxation on the dividends paid by the SCPI on the basis of your marginal rate of tax. The dividends are also subject to social charges at the rate of 15.5%.

That part of the dividends generated from rental income is taxed as rental income (revenu fonciers) not a dividend from shares. As revenue fonciers you are granted an allowance before you become liable for tax and social charges, either under the regime micro-foncier or the regime reel, depending on your circumstances.

Income generated from the SCPI simply through interest on cash balances is taxed without allowance.

That probably means that your marginal rate of income tax in France needs to be below 30% for such investments to earn a decent net return, but very few expatriates pay French income tax at this level.

If you sell your shares, they are subject to capital gains tax, although a sale in the year of under €15,000 generates no liability to the tax and there is tapered relief over 22 years.

In order to maximise your fiscal position, it is possible to purchase an assurance vie contract that contains an SCPI envelope within it, which would give tax advantages.

Charges

As with most forms of investment there is a catch, which in the case of SCPIs is probably the level of their charges.

The subscription fee (frais de souscription) into an SCPI is between 8% to 14% of the rental, which includes the 5% registration tax payable. The annual professional management charges (frais de gestion) can be around another 8% of the rental, although the average net returns of 5% are after deduction of the management charges. Some SCPIs also make a charge for managing the sale of shares in the event you wish to exit, which may be several percentage points.

As a result, investing in an SCPI is more a medium term proposition, with 10 years generally considered to be the minimum time to hold the shares.

Selection

In considering which SCPIs in which to invest you clearly need to take professional advice.

There are a number of brokers (conseillers en gestion de patrimoine indépendants) around who would be able to advise you, but you need to ask about the level of their experience in this area and the degree of their independence.

You should also seek clarity as to the basis on which they would be remunerated, whether via commission from a third party or fee by you, or a mix of both.

It also pays to do your own homework; no shrewd investor relies entirely on professional advisors.

Amongst the factors to consider, in addition to the historic level of the return and the charges, are the quality of the portfolio, the level of occupation, and the quality of the management team.

You also need to consider how easy it would be to sell your shares if you no longer wished to continue to invest. You will need to pass through the SCPI to do so, and whilst this would not necessarily pose a problem, the sale price of the shares cannot be guaranteed.