Real estate funds – Overview

Many factors argue in favour of real estate investment. These include predictable cash flows, the lack of correlation between real estate and other assets, low asset price volatility, asset diversity, risk management, the push for portfolio diversification or alternative assets, open markets and the development of a professional and experienced market. Nevertheless, a link was needed between financial management and property-related investments. Real-estate investment schemes, or OCPIs, were thus created to close this gap.
With collective real-estate investment, investors seeking property-related assets have access to professional expertise, diversification of their investments and economies of scale that are harder to obtain under other circumstances.

AMF authorisation
The AMF issues an authorisation to real estate collective investment undertakings (OPCI) and professional real estate collective investment undertakings (OPPCI) on their creation after checking the information supplied in the regulatory documents (undertaking rules or articles of association and KIID and/or prospectus, where applicable) and in advertising documents.
This authorisation is issued on the basis of an authorisation application file in accordance with the provisions of Instruction DOC–2011-23.
The AMF also monitors these funds throughout their lifetime.

The OPCI: a modern investment product

Before OPCIs (Real estate collective investment undertakings)  were created, the main vehicles for property-related investment were real estate investment trusts (SCPIs) and listed real estate investment companies (SIICs). The creation of SIICSs modernised real estate investment, but the purpose of OPCIs is to enable larger number of investors to acquire property assets, without the need for a public offering of securities.

The regulatory and tax constraints on SCPIs prevented them from adapting to current market changes. With the launch of the OPCI, the real estate investment industry has been modernised for the greater benefit of investors. This new investment vehicle gives access to other tax rules than those applying to real estate income, as well as to more dynamic management of real estate assets by promoting the liquidity of asset portfolios.

OPCIs are the nexus between two financial cultures: securities investment and real estate investment. They benefit from the efficient and attractive legal framework for collective investment schemes and from some of the tax benefits of SIICs.

The total capitalisation of OPCIs at end 2015 was nearly EUR 62 billion. It should be noted, however, that OPCIs have not developed at the expense of SCPIs (EUR 37.8 billion) and SIICs (EUR 109.6 billion). Their growing popularity simply shows that they serve a useful purpose in the French investment market.

This new investment vehicle also gives the French market a powerful tool for competing with European real estate investment funds, which now own most of the commercial real estate in France, and thus help attenuate the current distortion of competition.

What is an OPCI?

An OPCI is a collective investment scheme specialising in real estate and intended for the general public. Its structure and legal framework are broadly inspired by those of collective investment schemes. Some versions of this product are intended for institutional investors (e.g. leveraged and unleveraged OPCIs with streamlined operating rules). OPCIs can take the form of an open-end real estate investment company (SPPICAV), which is equivalent to an open-end investment company (SICAV), or an unincorporated real estate investment fund (FPI), equivalent to an unincorporated investment fund (FCP).
This new investment product is intended exclusively for investment in rental properties. OPCIs can buy any type of building (new, old, before completion), either directly or through other companies, or have properties built to order. Under these circumstances, and because the work carried out is solely for the purpose of renting out the properties, OPCIs are allowed to carry out all the operations necessary for the use of the properties (improvements, renovation, conversion, etc.)

OPCIs are required to hold:

  • Real estate assets, accounting for at least 60% of their portfolio, with some differences in portfolio composition for SPPICAVs and FPIs, stemming from the tax rules applying to them,
  • A cash reserve, accounting for at least 5% of their portfolio,
  • The rest of the portfolio should be made up of financial assets (e.g. securities).

This structure has the inherent characteristics of collective investment schemes enabling investors to enjoy greater liquidity, since the minimum real estate investment ratio is much lower than for an SCPI – 60% instead of 95% – and fosters more dynamic financial management of the portfolio.

Did you know ?

As is the case with collective investment schemes, OPCIs enable investors to buy or sell their shares at any time at a net asset value determined by the scheme’s management company. The net asset value may be calculated every two weeks or twice a year. Buy and sell orders may be settled up to six months after the orders are centralised.

In addition, the legislation in force allows OPCIs to use leverage. Their management can be even more dynamic, since they are allowed to borrow:

  • Up to 40% of the value of their real estate assets to finance property acquisitions or improvements,
  • Up to 10% of their financial assets to cope with redemption requests.

The legislation also provides for a mechanism to protect small retail investors. The mechanism suspends redemptions when an investor holding more than 20% of the OPCI’s assets requests redemption of a certain number of shares or units. This mechanism is intended to guarantee greater liquidity for small investors in the scheme.  Its purpose is to prevent the sudden departure of a major investor, which could be harmful to the other investors’ interests.