AFIL presents an unprecedented study to alert the State to the future of intermediate rental housing

The objective of this study, co-financed by several housing stakeholder associations, is to quantitatively define the attractiveness of the two schemes: "Individual" via the PINEL and "institutional" via the LLI, then to compare the costs for the state of one or the other of these two options and to evaluate the effectiveness of the support mechanisms for new rental property in France and its attractiveness for the end investor.

Despite the paramount importance of Pinel in the construction of housing for 20 years, certain voices within the public authorities seek to replace individual investors with private institutions and to gradually eliminate the Pinel system, the end of which is already scheduled. in 2024.

Although repeatedly decried, the Pinel system nevertheless remains the main provider of intermediate housing in France, with nearly 200.000 housing units in progress. On the side of the LLI, an investment product intended for institutional players only, the tax advantages which initially consisted of a VAT rate reduced to 10% and an exemption from property tax on built property (TFPB) for 20 years, have been recently somewhat modified by the Finance Bill (PLF) 2022: now, the exemption from TFPB is replaced by a corporate tax credit (IS) for an equivalent period.

Renaud Cormier, President of AFIL explains: “Since its creation in 2018, we have wanted AFIL to play a major role in bringing together players in intermediate housing. Through this study, we wish once again to contribute constructively to the debates around the issue of housing, which concerns a large majority of French households. Thanks to this study, we want above all to stop opposing ideas to convictions and to provide factual answers on the consequences of this new orientation for our country and for the sector. »

The context :

Aid for new rental investment in tight areas having already been the subject of studies to demonstrate their effectiveness, the debate is now shifting towards a possible optimization of the sums allocated. The idea is that the budgets allocated to support mechanisms for intermediate rental investment via the current mechanisms (Pinel, LLI, PLI and Loc' Avantage) would be more effective if they were redirected to so-called institutional housing players via OPCI-type real estate funds. In a context that is often hostile to support mechanisms for new real estate in intermediate housing, the desire for stronger intervention by private institutional investors comes up repeatedly in the debates.

Pierre Sabatier, founding president of PrimeView explains: “This study makes it possible to factualize and objectify a debate which deserves our interest because of the societal role and the economic importance of intermediate housing for French citizens, who need this type of housing to access their workplace. »

“Intermediate housing”: social purpose & effective incentive schemes

Intermediate housing is aimed above all at the middle classes and young households who leave the field of social housing because of their income and who wish to live in geographical areas where the real estate market is tight.

The political will to provide intermediate housing in tense areas has prompted the public authorities to implement investment incentive schemes for many years. The three main ones are the PLI, the tax incentive (today corresponding to the Pinel) and the LLI.

It should be noted that so far, incentive schemes for individuals (with 900.000 housing units built over the past 20 years, including nearly 200.000 for the Pinel) have proven to be more effective than subsidized financing (145.000 housing units for the PLI and the LLI) to develop the intermediate offer.

Despite the existing measures, the market is threatened: Renaud Cormier launches the alert!

“The expected supply shock did not occur. At the end of April 2022, 392.600 housing units had been started in France over 12 months, i.e. a volume equivalent to that of the end of March 2017. Worse still, these low levels of authorizations and housing starts have only been achieved thanks to the support demand for individual housing, presumably in response to episodes of confinement. The production figures for collective housing are alarming: the volume of building permits for apartments has still not returned to its level of February 2020 (before the 1st confinement) and collective housing starts have stagnated for 1 year. .

Faced with growing demand in tense areas and more recently in medium-sized towns, the insufficient creation of new housing maintains a shortage which leads to an inevitable rise in selling prices. This price increase is mainly reflected in the market for old properties, which represents the overwhelming majority of transactions. In 20 years, the prices of new properties have increased by 117% and those of old properties by 137%. Today, housing accounts for more than 26% of household final consumption expenditure.

Today, the private rental market is under threat. The decorrelation between the evolution of rents and that of the price of housing has durably weakened rental yields: in 30 years, the real price (ie adjusted for inflation) of existing housing has been multiplied by 2 while real rents have increased by 30%. These yields will fall further in new construction with inflation and rising construction costs. A possible freezing of rents would deal a fatal blow to rental investment, in a market where the relationship between lessors and lessees is already highly unbalanced in favor of the latter.

The urgency is there: in the 1st quarter of 2022, sales of new homes to retail investors fell by -18,2% over 12 rolling months^[1] and this decline is accelerating, with -23,6% over the quarter. »

^[1]FPI, New housing figures, 1st quarter 2022.

Presentation of the main results of the study

“Pinel” device: more profitable for individuals!

The first results of this study show that among the three main mechanisms put in place to encourage the construction of intermediate housing (PLI, LLI, tax exemption), only tax exemption (corresponding today to Pinel) has proven to be truly effective and remains the mainstay of intermediate housing construction in France. The Pinel tax credit also makes tax marking convincing: it remains more interesting to invest in new intermediate housing via Pinel (between 1,4% and 1,6% profitability excluding leverage and resale of the according to the scenarios studied) than in common law (0,6%).

The study also strongly affirms that most of the profitability of a real estate investment is also based on the leverage effect: two thirds for a Pinel investment (between 4,7% and 4,8% annual profitability) and even 80% for common law (4,3% final profitability).

Finally, the study clearly insists on the fact that the attractiveness of Pinel will deteriorate with the new measures voted within the framework of the PLF 2022. In a context where the equity markets posted a total return of 5,4% per year over the past 20 years, the foreseeable drop in future Pinel yields could therefore lead to a substantial decline in the production of intermediate housing as early as the next two years.

Renaud Cormier, President of AFIL says: “The Pinel without recourse to credit makes much less sense and concerns a minority of investors with sufficient liquidity. In a context of rising interest rates and low wear rates, in my opinion, the conditions for granting loans should not be tightened. Default rate statistics on buy-to-let financing are extremely low. The Pinel model is robust and remains profitable from all points of view”.

Endangering the production of intermediate housing.

This study also states that the withdrawal of the Pinel scheme in favor of the LLI scheme as envisaged by the latest reports would be likely to put intermediate housing in great difficulty in France due to the lack of profitability of this sector for institutional investors in comparison of other existing assets, despite the tax incentive dedicated to them. In fact, the withdrawal of the Pinel system will drastically reduce the number of intermediate dwellings built (estimated 40.000 and 50.000 dwellings created per year during the 20 years preceding the Covid).

Accumulation of intermediaries for LLI: Negative return and insufficient profitability

According to the results of this study, the annual return of an OPCI investing in intermediate housing would reach -1,4% annually on a like-for-like basis, excluding any capital gain associated with resale: the sum of the charges inherent in the accumulation of intermediaries involved in the LLI system would systematically exceed the income generated by the rents and the tax credit, resulting in a negative rental yield for the end investor. Management fees should be reduced by 60% (from 1,8% initially to 0,75% of gross assets) charged by management companies so that rents and the tax credit simply offset the charges. Even without taking on charges for the management company, rental profitability would only reach 0,7% annually, compared to between 1,4% and 1,6% for Pinel depending on the scenarios studied.

This survey also reveals that the only source of profitability in this mechanism would come from the capital gain collected on resale, which would be a bad signal for the stock of intermediate housing for rent and would push up transaction prices. According to our calculations, it would take more than a year for the rental income without any management fees to offset the OPCI entry fees.

LLI or Pinel: Consequences and tax revenues for the State?

For intermediate housing built, we have not identified any notable differences in terms of tax revenue generated by the State between Pinel and LLI: the construction of Pinel housing for the State would reach between €40k and €46k according to the scenarios studied, compared to €42k for housing built using LLI.

The survey reveals, however, that the abolition of the housing tax will lead to a loss of income for the municipalities which will have to be compensated in one way or another. This compensation will most certainly take the form of an increase in the TFPB in the years to come. In fact, where the Pinel system only exempts the payment of the TFPB for two years, and therefore "costs" the State compensation for this outstanding payment to the municipalities, it is likely that the LLI system, which exempts for 20 years of TFPB will cost the state massively more if this tax increases.

The main observations arising from this

In view of the too great weakness of the income generated by the capping of rents in the intermediary for an OPCI, it would be necessary for the LLI system to be really able to take over from the tax exemption systems in favor of individuals:

Less investment in work to reduce the charges borne by the OPCI. This measure would, of course, be counter-productive at a time when the current energy transition is accelerating.

More risks taken on the share of non-real estate assets held by the OPCI. This would lead to a distortion in the risk purchased by the end investor, who most of the time turns to real estate for its status as a safe haven and good leverage to build up assets in preparation for retirement.

More costs for public finances to compensate for the structural weakness of the rental yield for the OPCI: we estimate the additional support by the State compared to the current LLI device at 80% of the price of housing, so that the profitability of the OPCI is equivalent to that of Pinel without leverage… against only 21% maximum of the price of the property under the current Pinel system.

Even assuming the activation of the previous levers to restore profitability excluding leverage and resale of the property equivalent to Pinel, this should not be enough to encourage the individual to subscribe. Indeed, a substantial part of the profitability of investments in intermediate housing via Pinel comes from the possibility of making them via a substantial loan (the proportion of debt reached 88% of the amount invested; see study published in 2019 on the subject ). The leverage effect thus mobilized makes it possible to maximize structurally low profitability due to the capping of rents, making the Pinel investment competitive with other traditional assets. However, the difficulties of acquiring an OPCI share via a loan will make it almost impossible for the end investor to use the leverage effect to the full extent to maximize its profitability.

This observation makes the gross profitability objectives for an OPCI all the higher: the return offered by this type of product must be structurally higher than that of a Pinel investment excluding leverage, to be as attractive for an end investor. . If this is not the case, it is likely that end investors will turn away from this type of product, leading to a reduction in the number of intermediate housing units built.

Finally, there is a structural difference in terms of the "product" purchased by the end investor: an investment via an OPCI is fundamentally different from a pure real estate investment (thus from an investment in Pinel housing directly or via an SCPI Pinel), whether in terms of underlyings for individuals, but also of risk. Indeed, a SPICAV-type OPCI is a hybrid product, made up on average of 60 to 65% of real estate assets, but also of 30% of financial assets (mainly shares and bonds) and 5% of compulsory liquidities. The less legibility of this type of product compared to a direct real estate investment will in fact make the marketing of this type of vehicle more difficult compared to the Pinel.

If none of these levers mentioned above (reduction in work costs and management costs, and increase in the level of risk for non-property assets and the tax credit associated with the LLI) is activated to restore minimum profitability for the OPCI in a context of the disappearance of the Pinel system, we consider it highly probable that there will be a collapse in the construction of intermediate housing in France, contributing to the acceleration of the tension on real estate prices in tight areas and de facto excluding middle-income populations.

The solutions studied:

Reduce middleman charges.

The study shows that even by reducing the costs of intermediaries, this remains insufficient. Even at 0%, the OPCI's yield would only reach 0.8% annually, ie half the Pinel yield excluding leverage and resale of the asset.

The state must increase the tax incentive.

The study also shows that for the yield of LLI to be equivalent to Pinel, the State would have to add 80% of the price of the property in the form of an additional incentive, compared to a maximum of 21% for Pinel today. Increasing the tax incentive provided by the State seems anachronistic and goes against one of the initial objectives, namely the proper use of public funds.

Generate additional performance

The study states that the OPCI's assets other than real estate would have to generate a performance of at least 7% annually to offset the rental yield of intermediate housing and achieve the same profitability excluding leverage as Pinel. The risk that the manager would have to take in his portfolio allocation would of course be far too high (without obligation of results) and would make this product, which is already hybrid, literally Unsellable.