Sipps and residential property have a poor history. Ever since Gordon Brown’s last-minute U-turn on residential property, Sipps investing in anything other than an authorised, listed commercial property fund or a straightforward bricks and mortar purchase seem to have been riddled with problems.
In the run-up to A-Day, advisers and providers were expecting a residential property bonanza as the British public seemed sure to further indulge in their favourite investment, this time with the benefit of tax- efficiency by funding the purchase through pension contributions.
Brown’s actions as Chancellor, although unpopular at the time, may well have saved many investors some money, at least on current property valuations. But his last-minute decision to exclude residential property left a lot of pent-up demand.
Since then, several companies have attempted to fill the void by offering property investments that fall somewhere between commercial and residential property but several have not lasted that long.
One of the first companies to try and fill the gap was Guestinvest. The company offered investors the chance to buy individual hotel rooms and get an income based on the room rental and a number of free nights accommodation. With promised annual returns of at least 6 per cent a year, the option attracted a lot of interest but the company went into administration in October 2008.
Another specialist approach to property investment was closed down last month when Freedom Sipp was placed in administration. Among the other mainstream investment options available to members, Freedom Sipp offered investors the chance to buy French and Canadian sale and leaseback holiday property through their pensions, again with guaranteed rates of return.
Although the problems that led to the winding-up of Freedom related to outstanding tax bills, there has been some reluctance among other Sipp providers to acc- ept a transfer of the overseas property inv- estments due to concerns that they do not comply with HMRC’s rules on allowable investments.
So is this the end of unusual property investments for Sipps?
Today, most investors will be limited to a choice of commercial property, UK real estate investment trusts and “genuinely diverse commercial vehicles”.
For many IFAs and their clients, commercial property funds are the most appealing option due to the diversification, liquidity and lower purchasing costs they offer over a direct purchase.
Baigrie Davis director Amanda Davidson says “The point here is diversification, which is important for investors. Sipp investors can invest directly into a commercial property if they wish but doing so will involve them in lots of transaction and costs.” But there are still one or two unusual investment opportunities available for investors determined to find something different.
The definition of commercial property can include farmland or commercially managed woodland and, although purchases of commercial property directly tend to focus on Sipp members own business premises, a Sipp can in theory buy any commercial property such as pubs, shops or car parks.
The last few years have seen the emergence of several student accommodation funds, with investment funds now available from specialist investment companies such as Unite, Brandeaux and Braemar.
Several of the funds have shown consistent investment returns in the last 18 months when most other investments have suffered some downturn. But the lack or regulation of some funds coupled with an offshore domicile means giving up some elements of investor protection and liquidity of some funds can also be an issue for investors.
For those determined to got some exposure to residential property, a new fund launch may be of interest. Dualinvest is distributed by Smith and Williamson and available through several Sipp providers, including, AJ Bell, Alliance Trust, Rowanmoor, Sipp Choice, Standard Life and Suffolk Life.
The close-ended fund is open for a minimum investment of £10,000 and is aiming to raise £25m to invest in empty new build residential property. The fund aims to by 65 per cent stakes in the properties from the housebuilders, with the builders then paying rent back to the fund.
The rent is paid up front for two years and after this period the property would then be re-sold. The fund aims to pay investors an annual return of at least 7 per cent and investors can also get 15 per cent of any upside profit but capital is protected if the portfolio’s value does not drop by more than 30 per cent during the two years.
Derek Uittenbroek of Smith & Williamson says: “Investors get their income upfront rather than having to worry about rent collection or occupancy rates. Meanwhile, the downside safeguard shields them from fluctuations in the market while still allowing them to enjoy a share of any pot- ential gain.”
Davidson, does not think she would necessarily jump on recommending this product but adds: “I don’t think that granting investors only 15 per cent of any upside is that attractive but I do think that investors will be attracted to residential property as an investment in their Sipp. We are obsessed with property in this country. Even when it goes down we love it.”
Regardless of whether the property investment in question is a single commercial unit, a diversified commercial property fund or a listed residential property fund, many advisers say investors need to be wary of having too high an exposure the asset.
Informed Choice managing director Martin Bamford says that most homeowners should be wary of residential property funds. He says: “Individuals need to avoid over-exposure to a single investment asset class. If you already own a property, you arguably have enough of your own wealth invested.”
Hargreaves Lansdown pension analyst Laith Khalaf says the firm is starting to see some value in commercial property after two torrid years of investment performance.
Khalaf says: “We have been bearish on commercial property for some time but are beginning to see some value in the sector.”
But despite the optimism, he says investors in commercial property should limit their exposure who recommends a typical maximum of 5 per cent exposure.