Investing in property through a Sipp

Nevertheless, it has recently come under the spotlight for two reasons. Firstly, the regulator’s capital adequacy paper highlighted commercial property as a non-standard asset, lumping it with far more exotic investments for its proposed capital calculation. Secondly, in a surprise move, the 2013 budget announced an intention for ministers to consider allowing residential property into Sipps.

With positive economic signs emerging every other day, property is an asset with staying power – demand is not going anywhere. But how will regulatory meddling affect this area of the market for Sipps?

Commercial considerations

Investing in commercial property is central to many Sipps. The vast majority of this investment is in UK properties, as detailed in Table 1, with 15,025 holdings across 45 providers. Other types of property still attract attention, however, with 1,184 hotel rooms – 1,032 of which are held in the Lifetime Sipp Company – 398 overseas properties and 423 land bank holdings.

The total number of properties across all providers, including those that did not break down their total into the four categories, stands at 28,364. The highest total holding comes from James Hay at 5,025 compared with an average of 630 per provider.

Not all Sipps allow borrowing but, for those that do, the average stands at £119,018 against an average property value of £258,832. There is a vast span of property averages across providers, ranging from £50,500 at the Rowanmoor Group to £686,458 in the JLT Gresham Sipp. Generally, loan sizes are lower than property values. One exception is Carey Pensions. The firm explains its skewed figures by saying its book of business contains a few very high-value properties that have lending alongside many much smaller properties with none.

If the FCA goes ahead with including commercial property in the non-standard assets part of its capital adequacy calculation, it will affect a great many providers and individuals. Its rationale is based on property being an illiquid asset that is complex to transfer or sell if a Sipp operator were to wind up. But, for some providers, this argument falls flat.

“Property has, is, and will be one asset-forming part of any pension scheme’s investment strategy to provide, hopefully, index-linked income and growth,” says Hamid Nawaz-Khan, chief executive of Alltrust. “To classify this as non-standard is bizarre. Yet a property unit trust is acceptable, even though in falling markets fund managers suspend the sale of the units. Thus the liquidity argument fails.”

There have been calls for property to be considered in a different way to other more esoteric assets that have different types of risk. The regulator has delayed its response to its consultation, with the industry hoping this means a closer look is being taken.

“Property is undoubtedly illiquid and slow to transfer in comparison to listed securities,” says Andy Leggett, head of business development at Barnett Waddingham Sipp.

“However, we believe the FCA needs to refine its view. Lumping all non-standard assets together misses details that are very significant to the health and value of a Sipp business. With direct investment in property there is a real asset, there is typically an income, and there is no real concentration of risk as members as a whole are invested in any different, unrelated properties.”

Indeed, some argue that certain risks are even lower for commercial property. “UK commercial property, although less liquid, is less susceptible to fraud than other investment sectors,” says Guy Young, director at NSS Trustees Limited. “It is harder to steal a building.”

If the regulator does persist in its views on commercial property, there is a real possibility providers will no longer offer it and/or fees will go up. Prices for holding property are outlined in Table 2. Although many represent good value, it is not a cheap option; raising charges could make property a less realistic option for many investors.

Residential consequences

Pricing and availability for residential Sipps is not even at the speculative stages yet. The announcement that residential property in Sipps was back on the radar for the government was unexpected, but it is not the first time it has been considered.

Prior to 2006, the government had contemplated its inclusion. But plans were shelved due to a number of concerns, including potential price distortions from huge flows of pension funds into house purchases and the misuse of the legislation to buy second homes abroad. And the market had already started to move in anticipation of the change – many bought properties hoping to gain tax advantages of putting them into a Sipp and some housing developments were allegedly targeted specifically at the Sipp market, prompting suspicions of aggressive ‘residential Sipp’ promotions. When the government made a U-turn in 2005, there was industry outcry and numerous disgruntled investors.

This time the scenario is quite different. The chancellor focused his attention on redeveloping town centres, saying: “The government will explore with interested parties whether the conversion of unused space in commercial properties in high streets and town centres to residential use could be encouraged by amending [pension] rules.”

Industry response to the news was largely positive, although with the caveats of proper safeguards, such as owners not being able to live in the investment property as their home. Some suggested an external property manager should be used and only buy-to-let scenarios permitted.

Ray Chinn, head of pensions and investments at LV=, wonders whether the government has an ulterior motive. “We remain unconvinced around some of the opportunities talked about in terms of holding residential properties within a Sipp, or commercial properties capable of conversion to residential,” he says. “Our view is that this probably has more to do with providing a boost to the housing market rather than mainstream pension provision.”

Either way, the government has yet to come back with a conclusion, with no specific timescale defined.

Onwards and upwards

Property, pensions and investment are inexorably intertwined. With the residential market on the up, Sipp investors would undoubtedly welcome the opportunity to get a look in. But with uncertainty and final-hour changes plaguing the previous time the idea was floated, providers and clients will not be rushing ahead this time.

And the jury is still out on commercial property. Nobody knows which way the FCA will go but, as its first major piece of legislation since inception, it will not want to get it wrong.

Ultimately, changes to terms of investment for commercial or residential property will have a significant impact on the market, whichever way they go.