SIPP from the Cup of Commercial Property Success!
Although SIPPs (self-invested personal pensions) have always offered the opportunity to manage your own pension, they have traditionally been tightly regulated and invested in traditional areas e.g. stocks, shares and unit trusts. Products have been designed for seriously wealthy investors with time to switch their investments around periodically, and the capital to cover high management fees and minimum investment levels.
However, SIPPs have developed recently to become more affordable: they cost the same to manage as standard personal pensions and minimum investment levels have fallen. But they have still been relatively conservative in scope. From April next year all this will change.
There will be a clear change in pension rules and we will be able to use SIPPs to invest in residential and foreign property (although this was recently criticised as representing a significant tax loss to the exchequer), fine wines, paintings or even a racehorse! They will also allow contributions of up to £215,000, with full tax relief on 100% of earnings up to this amount.
However, this new 'laissez-faire' philosophy is not reflected in government attitude towards commercial property. At the moment a SIPP can be used to borrow up to 75% of purchase price on commercial property. From April 2006 that will be reduced to 50% for all property.
SIPP holders would be well advised to view the following months as a last chance to bulk up on commercial property, which has proved to be the best performing asset class over the last 10 years, significantly outperforming equities and gilts. Disappointing stock market performance and pension funds scandals correctly make the world of tangible assets look particularly welcoming to today’s investor. Compared with residential properties the commercial sector has the advantage of higher yield guaranteed by longer and more onerous leases which are secured by big, commercial tenants. Commercial property is a steady anchor for products such as SIPPs which allow for greater creativity – and perhaps frivolity – on the part of the amateur investor.
However, the heralding of commercial property as a new leading sector has predictably made the market very buoyant – investors pushed up the value of commercial property by 6.2% over the last 6 months of 2004 with residential prices only rising 4.2%.
This makes things difficult for the individual. It is important to be going in with the capital to be competitive, not stretching to afford unattractive properties – nothing is harder to shift than substandard commercial property. From a rental perspective too, what makes the sector attractive is the security that big tenants offer. The best tenants will be looking for the best locations and premises which are unlikely to be affordable as part of a balanced portfolio of investment.
To take full advantage of this window we would recommend that investors use a commercial property syndicate to raise their buying power and get into really attractive property. However, commercial property syndicates are as yet unregulated by the Financial Services Authority and the proliferation of unlikely looking property companies selling syndicate products can make the inexperienced investor wary.
Nevertheless, in keeping with the SIPPs theme of greater freedom, syndicates can be formed privately among friends, family or colleagues. In such cases advice will be required to ensure that interests are protected and the possibility of dispute is catered for. As leaders in the commercial property field, Semple Fraser LLP have the expertise to give cutting edge advice on the market and ensure that your interests are protected contractually.