The new French revolution

It has taken investors by storm. The new regulated non-listed investment vehicle, OPCI, should boost property allocations. Nicolas Simon reports

The market for real estate investment vehicles is constantly developing to provide investors with the most flexible and innovative real estate investment products. After the launch in 2003 of the listed vehicle Société d'Investissement Immobilier Cotée (SIIC), the equivalent to REITs, the recent creation of the OPCI has finally filled in a gap in the French property investment world.
At first regarded as an up-to-date version of the SCPI - the existing type of French collective investment scheme - the Organisme de Placement Collectif Immobilier (OPCI) in fact benefits from the most modern concepts available to mutual funds, such as diversification of risk, outsourcing of management, right of redemption, etc. 
Approved by parliament in 2004, the OPCI is defined as a collective savings product investing in real estate. The OPCI exists either as a ‘fonds de placement immobilier' (FPI, a real estate investment fund), or as a ‘société de placement à prépondérance immobilière et à capital variable' (SPPICAV, an investment company with variable capital investing primarily in real estate) with limited or unlimited leverage.
The OPCI regulations - issued by the French financial markets authority (AMF) earlier this year - are currently raising significant interest from both asset managers and investors willing to benefit from the multiple advantages of the vehicle.
Similar to other non-listed funds, the OPCI offers investors diversification, mutualisation and a professional access to specific and complex markets. According to the general regime for retail funds (for individual investors), the OPCI should invest at least 60% of its total assets directly or indirectly (through real estate companies) in real estate assets, and at least 10% in financial instruments and other monetary assets (the liquid assets ratio). The balance may be invested in diversification products such as equities, bonds, other mutual funds, derivatives, etc, designed to enhance liquidity.
In case of redemption a rapid access to liquidity can thus be ensured, like listed vehicles would, while avoiding the volatility of REITs. The total value of REITs has fallen by 30% in France since January 2007.
The use of leverage to boost the performance should reach 40% maximum loan to value of non-listed real estate assets and 10% maximum loan to value of other assets. Indirect holdings will enable international investments with appropriate tax structuring.

But the OPCI regulation goes further: the AMF supervision guarantees investor protection as both asset managers and funds are subject to the approval of the French financial markets authority and to rules governing prudence in investment. This ensures the eligibility of the OPCI for institutional investors.
Investors who had traditionally gained exposure to the property market through direct investments or non-regulated corporate vehicles - known as société anonyme - or through Luxembourg structures can now invest in a French mutual fund avoiding the constraints of such types of funds, which include tax leakage, complex structuring, etc.  A specific product with relaxed operating rules - similar to Germany's Spezialfonds - was created for institutions and professional investors.
Furthermore a double asset valuation by two independent real estate valuers must take place four times a year. This guarantees a high degree of transparency and the immediate reflection in the NAV of the latest developments of the underlying real estate markets. This contrasts with share prices of listed funds which are often disconnected from private real estate performance. The net asset value of the OPCI is calculated according to regularly updated real estate appraisals.
The tax transparency of the OPCI is the other very attractive advantage for institutional investors. The funds themselves are exempt from taxation and investors can be taxed at either the rate applicable to real estate income and capital gains or at the standard rate for corporate income payable on investments in French mutual funds.
Some 85% of income and 50-85% of capital gain must be distributed. If the OPCI takes the form of a SPPICAV, it will benefit from the SIIC tax advantages on acquisition, meaning a reduced rate of 16.5% tax on capital gain for the vendor. Foreign investors and asset management companies will therefore have the opportunity to use OPCI to gain direct access to the French real estate market, one of the biggest in Europe.
The AMF has already authorised 13 asset managers to offer OPCI products and the OPCIs have just started to invest.
Non-listed real estate funds provide investors with an alternative route to real estate exposure and offer a wide range of alternatives both in countries and sectors, enabling more diversification than in direct real estate investments.
Highly flexible and transparent, the OPCI is the most modern vehicle and will enable French and foreign institutional and private investors to benefit from an extended array of real estate collective investment vehicles. Institutional allocation to real estate is currently estimated at 3-5% of total allocations.
With the OPCI this ratio should rapidly grow as European institutional investors now have access to an optimised vehicle at their disposal to gradually increase their property exposure.