Editorial - May 2023


Temps de lecture : min

Bricks and mortar or paper assets

Both commercial and residential property are making the headlines at the moment, particularly with the difficulties faced by regional banks in the US refusing to go away. It is true that the last real estate crisis in Europe and specifically in France in the 1990s was a harrowing experience, with a litany of developer bankruptcies, over-indebted households and bank wobbles. And an aftershock that rumbled on for many years.

Today, the picture is very similar to back then: a real estate bubble, interest rate rises (bigger and faster than in the 1990s) and developers already beginning to struggle.

But there are also notable differences. First of all, real estate was mainly financed by banks at the time and therefore regulated by dedicated supervisory authorities. Today, European real estate funds commonly account for more than 30% of commercial real estate.

In the consumer market, meanwhile, the marketing of real estate investment companies (SCPIs) to individuals has also reached an unprecedented scale, whether directly or via life insurance policies.

« By contrast with bank financing, in the case of commercial real estate we are faced with an unregulated sector that enjoyed investors’ favour in a zero interest context, where the search for yield led them to diversify into an array of illiquid assets. The illiquidity of these funds will be a major problem in the future. Mostly open-ended, they lack sufficient liquidity to deal with redemptions, and some have no gate mechanism in place. This means that a fall in property prices will have knock-on effects. »


Furthermore, a good number of these funds are domiciled in Luxembourg, making them relatively opaque and meaning that the fallout will not be limited to Luxembourg but could spread to several other European countries.

Households’ assets, meanwhile, face the risk of being doubly impacted by the fall in property prices.

In the 1990s, severe as it was the real estate crisis took the form of a decline in the value of physical property. Although very significant, for many the drop in value concerned assets they used rather than investments, making it “manageable”.

Today, households are doubly exposed, through both physical and paper property assets.

Real estate crisis pain will be much more acute, particularly for households that have these SCPIs bundled into life insurance policies taken out for retirement. And that’s with borrowing rates in France that are fixed – unlike in some European countries where rates are variable, and the financial stress will be a good deal worse.

Written by

Director of the International Actions division

May 23, 2023

Covéa Finance, a portfolio management company of the MAAF, MMA and GMF groups with share capital of €24 901 254, incorporated as a single-person simplified joint stock company, registered with the Paris Trade and Companies Register under number 407 625 607 and approved by the French Financial Markets Authority under number GP 97 007.

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