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A consumer’s view – Lorna Bourke

The mad rush to put residential property into a self-invested personal pension is already under way. Mortgage lenders and brokers report an increasing number of calls from interested investors, keen to know what the criteria of lending will be, what properties are likely to qualify, and how they go about it.

Brokers Charcol and Savills Private Finance say they are already seeing clients committing themselves to new developments “off plan” ready to switch them into their Sipp after April 5 next year. Those with existing Sipps are stuffing them with cash as fast as they can, ready to buy as soon as it becomes possible.

But interestingly, John Heron of buy-to-let lender Paragon says it is not buy to let which is attracting all the attention – it is the possibility of buying a holiday home abroad at a 40 per cent discount which seems to appeal to most investors.

Heron reckons that Sipp property investments will boost the 20bn a year buy-to-let market by at least 3bn, an increase of 15 per cent. He believes this is a very conservative estimate and that the actual figure could be much higher. More than half Paragon’s customers have expressed an interest in putting a property into a Sipp as soon as they are able to do so.

But will it all end in tears? The danger is that there will be a rush to buy buy-to-let properties and holiday homes both in the UK and abroad, just as the rental market is collapsing.

Villa rental companies admit that rental yields have been falling for several years and owners are lucky if they can cover their costs.

In the buy-to-let market, there is already a glut of unoccupied rental properties at the upper end of the market in central London. Prospective tenants visiting developments such as Imperial Wharf in Ful- ham can have their pick of half a dozen identical flats for rent.

There are huge new developments at Paddington Basin, Greenwich and Battersea Reach which are coming on stream and an estimated 50 per cent or more are bought by overseas investors, many with 100 per cent loans on which they get tax relief. These will all become available for rent.

In Australia, where the government introduced similar tax incentives for borrowing to finance property investment, rental yields in cities such as Sydney are down to 1 per cent – if landlords can find a tenant at all.

The market for corporate tenants prepared to pay 500 a week or more for these new flats is thin. Even at the lower end of the market for flat-sharers, which accounts for the majority of buy-to-let properties, rents have not risen for three years or more in many parts of London.

If, as seems likely, the economy slows and unemployment starts to rise, demand will weaken further – just as all the new Sipp buy-to-let properties are coming on to the market.

Residential property held within a Sipp will be owned by the pension trustees. If they cannot find a tenant prepared to pay enough to cover the cost of any borrowing – and all the indications are that most Sipp investors want to borrow to buy property – they have three choices.

If there are other pension assets, they can use them to pay the mortgage, persuade the pension plan holder to make more contributions to cover the shortfall or sell the property.

The new Sipp rules allow the fund to be 100 per cent in property. With the average property now costing nearly 200,000, there could be a large proportion of Sipp investors whose only pension asset is the property. If the rental income does not cover the borrowing costs and they cannot afford to finance the shortfall with higher contributions, lenders will foreclose. There could be some very unhappy Sipp investors if they are forced to sell at a loss.

It is up to pension advisers, mortgage lenders and trustees to ensure their clients are not making a big mistake investing in property just as the market runs out of steam.

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