Inexperienced, yield-hungry French retail investors are pouring money into real estate funds, pushing up prices for the best European commercial properties to unsustainable levels, according to Fidelity International Ltd.
Inflows into so-called societe civile de placement immobilier, French collective-investment vehicles that purchase properties and other assets across Europe, reached 5.6 billion euros ($6.5 billion) last year, a third higher than in 2015, Fidelity said in a report. Money is pouring into these funds in search of higher returns compared with stocks and bonds and because of their favorable tax treatment.
As a result, prices for prime commercial properties in cities including Berlin, Paris, Madrid and Zurich are now well above their their 2007 peaks, according to Fidelity.
Yet last year’s Brexit vote shows how a popular market can quickly turn sour. Retail investors rushed to withdraw capital from U.K. property funds in the aftermath of the June 2016 decision to leave the European Union, forcing some managers to suspend trading. French funds risk a similar fate if returns falter and managers face demands to return cash, Fidelity said.
Many French retail investors are not “familiar with how this asset class works and believe it can be exited flexibly when required,” said Adrian Benedict, the real estate investment director at Fidelity International. “Their demands for liquidity could easily collide with a reality of forced sales and collapsing returns, or even investor lock-ins when the market turns.”
Returns from property funds, which have comfortably exceeded those from bonds or stocks, could collapse and lead to a surge in withdrawal requests, according to the report.
“We do not think the market has reached this level yet,” Benedict said. “But we are increasingly cautious; it has all the hallmarks of a bubble which buyers enter at their own risk.”