With stock markets, once again, showing that values do go down as well as up – sometimes at an alarming rate and in a very short period of time – it might not be such a surprise that other asset classes have been gaining popularity with those willing to look further afield.
Gold for instance now trades upwards of $1,600 an ounce, more than 100% above its lows at the end of 2008. Another asset class that has shown a notable recovery and has become an increasingly regular favourite in the SIPPs market is directly held commercial property.
But what have been the drivers leading this resurgence in this primary asset class? Obviously the market took a terrible pounding in the second half of 2008 and hit lows in 2009. Although quite often touted as an uncorrelated asset to equities, in times of extreme cash illiquidity and credit crunch, property suffered every bit as badly as other asset classes.
However, there are now some signs of sustained increases in capital value, backed by the Investment Property Databank’s property index that showed a total annual return of 15.1% in 2010, of which the majority was capital appreciation. In addition, the hands on the windpipe of commercial lending have been removed with a number of lenders re-entering the market and creating a more competitive rate driven environment.
When considering direct property as an asset class, however, research shows that less than 33% of directly held property is acquired as a pure investment with the majority being utilised to further the client’s business in some way, usually through self occupation. This highlights that, clearly, some confidence must be returning to the economy and to the business expectations of such clients.
It is a shame, then, that successive legislative changes have not helped the acquisition of commercial property. The reduction in annual allowance brought about by the anti-forestalling rules in 2009 stunted substantial funding of pensions for the high net worth individuals that make up the majority of the bespoke SIPP and SSAS market.
The restriction in pension scheme borrowing to only 50% of the value of the vehicle’s assets has also resulted in the outright purchase of direct property being more problematic than before A Day. To some extent the new annual allowance of £50,000 introduced from April 2011 along with a carry forward facility has reversed some of these previous barriers.
For these reasons it is now far more common to see purchases structured on a joint basis. This might involve several SIPPs joining together or acquiring property jointly with the member or members’ company. The latter option also allows for another increasingly popular process – the staggered property deal.
Doing the maths
For example, take a property valued at £500,000 including costs. If two partners in a business have SIPPs each valued at £100,000, with borrowing this results in the SIPPs being able to contribute £300,000 or 60% to a property purchase. If then their company has £100,000 of available capital and can raise a further £100,000 through bank finance it can contribute the remaining 40%. The acquisition is then structured through a side trust that acts effectively as a nominee and in which the 60:40 split is recorded. The property is then let back to the business with the rental yields set at an evidenced commercial rate and being more than sufficient to cover mortgage payments.
