VULTURES circling over the French property market are finally getting a taste of red meat. Last week, Credit Foncier became the latest in a line of French financial institutions to take a large write-down against its property assets. Experience suggests that disposals will follow.

The vultures - mainly US investors, although many have European partners - hope to grow fat by picking over the unwanted assets of institutions such as Credit Foncier.

Several deals have already been struck. In December, Barclays Bank sold the bulk of its French property loan book to a US consortium including Lehman Brothers, the investment bank, Cargill, the financial and commodities group, and LaSalle Partners, the property management company.

Earlier this year, Groupe Suez sold a similar portfolio of distressed property loans to a consortium led by the Whitehall Fund, an investment fund run by Goldman Sachs, the US investment bank. Other US investment banks, including Morgan Stanley, are working hard to find similar deals.

The market in distressed loans is potentially huge. Analysts estimate French banks and insurers are sitting on French institution to market a portfolio of distressed property assets. Others are likely to follow.

It is no surprise that US investors dominate the list of potential buyers. Many of them made handsome gains in the early 1990s in the aftermath of the collapse of US real estate values. This experience taught them how to value complex loan portfolios and demonstrated the remarkable gains which can be made from distressed debt.

"The returns on equity on the early (US) deals were more than 50 per cent, even before leverage was applied. In the early stages of this kind of market, the returns can be staggering," says one US investor.

The deals now being done in France certainly look familiar to US eyes in terms of structure. Banks are selling portfolios of doubtful loans, secured on individual properties, at a discount to face value. The discount is usually between 30 per cent and 60 per cent of face value, depending on the quality of the assets.

Investors analyse the portfolio loan by loan and decide whether they can make a profit by either striking deals with borrowers or exercising their security and taking possession of the underlying property. This requires a careful marriage of financial, legal and property expertise.

The Whitehall Fund consortium includes Vines, a private property company run by Martin Myers (who is also chief executive of Imry, the property company owned by Barclays), and Miles D'Arcy Irvine, a property investor with many years experience in the French market.

However, there are some crucial differences between the US and French property markets which mean that investment returns could be significantly lower. "There is a danger that people will go gung-ho into the market and pay too much. We've looked at deals but competition for them is intense," says one European investment banker.

First, French financial institutions are generally under less pressure to sell than their US counterparts. The Resolution Trust Corporation, the US government-backed body which cleared up after failed savings and loans institutions, was under a legal obligation to sell. Private sector banks faced intense pressure from shareholders.

French banks and insurance companies, in contrast, are able to take a more relaxed attitude. Many have already set up ring-fenced vehicles to deal with problem loans and are only likely to sell if the price is attractive. Against this background, the French distressed loan market is unlikely to balloon in the way that its US counterpart did in the early part of the decade.

Second, the French legal system is much less favourable to lenders than Anglo-Saxon law. Taking possession of properties granted as security on loans in default is far from easy. Buyers of distressed debt are more likely to prosper by striking deals with borrowers, rescheduling loans and exchanging some of their debt for equity participations in the underlying properties.

Third, the French property market overall looks less well placed for recovery than the US market did a few years ago.

Many of the investors who bought distressed loans from the RTC caught the upswing in the US property market, helped by very low interest rates which were used to help recapitalise the financial system.

France, meanwhile, is still struggling with relatively high interest rates courtesy of its link to the D-Mark in the European exchange rate mechanism.

Neither does the French economy have a record of dynamic job creation which has helped fuel the recovery in US real estate.

It is a completely different situation to the US. Property in France has had a steep decline and is probably now at the bottom of the cycle. But if it stays at the bottom for five years, you could end up making a lousy investment," says John Carrafiel, head of European Real Estate at Morgan Stanley.

If investors can avoid paying too much, though, it should be possible to make reasonable investment returns from French distressed property loans.

Buying large portfolios at a discount and breaking them up - buying wholesale and selling retail - is generally a profitable investment strategy.

After a small dip last year, French property values have probably reached their nadir. Although the upswing promises to be steady rather than spectacular, investors are also buying close to the bottom of the market. Moreover, the French property market as a whole should benefit as domestic financial institutions write-down assets to realistic levels.

The frozen market of the last two years, when very little property changed hands for fear of crystalising losses, was damaging in itself. The introduction of new capital - even if it looks like vulture capital - must surely be an encouraging sign.