Over the last year, a number of Sipp providers have been restricting what types of investments they will allow their customers to select.
This has largely been to restrict access to unregulated collective investments in an effort to protect consumers more from the risks of invest-ing in markets that are not backed by the Financial Services Compensation Scheme.
But in recent weeks, restrictions are creeping in for those wanting to invest directly in commercial property. First, Standard Life announced that it will not allow its Sippss to borrow to purchase commercial property and now Hornbuckle Mitchell has introduced a liquidity requirement and threshold for commercial property investors. What has prompted these changes?
Let’s look at unregulated collective investments first.
The restriction of these investments has been brewing for a couple of years after several high-profile investment collapses left many Sipp customers much worse off, and investigating the role of Sipp providers in allowing access to those investments.
Sipp providers do not want to collect small administration fees and be put at risk of guaranteeing investment success and so it is simply more acceptable to their business owners not to allow investment in unregulated collectives in the first place (or drastically increase due diligence before allowing such investment, thereby leading to an increase in investment costs for the customer).
This approach aligns with the regulator’s desire to discourage the public from using unregulated collectives and so the Sipp market is seeing its investment flexib-ility curtailed even though legislation allows such investment.
The change of approach on direct investment into commercial property – which is much less susceptible to fraud than an unregulated collective as you have the Land Registry storing details of ownership – is surprising. The driver is possibly a desire to reduce the chance of a Sipp member’s fund from running out of cash to pay its bills.
Commercial property can be a fantastic investment – even when borrowing is needed to finance the purchase – while rents are coming in. But a void period can create liquidity problems extremely quickly.
Business rates still need to be paid even if there is no tenant and where there is no tenant, the cost falls to the property owner, that is, the Sipp. There can be costs of finding a new tenant or arranging for a sale, as well as other costs, for example, for electricity or site security. If you include mortgage repayments, you can see how any spare cash can soon be swallowed up.
When the Sipp has no cash, this can cost the Sipp provider time and money to resolve.
The above has been the case for the last few years and arguably was more relevant in the aftermath of the credit crunch than it is today.
The regulator is finalising how much of a buffer Sipp providers should hold to ensure business can continue during tough times and wants to link this to the underlying Sipp investments being held.
I wonder therefore whether this recent trend of wanting Sipp customers to have higher levels of liquidity if investing in commercial property is an early indication of what the regulator may announce later this year.
Andrew Roberts is partner at Barnett Waddingham LLP