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Sipp building

Director Mark Pepper tells Lee Jones how the credit crunch sparked the development of a commercial enterprise using clients’ Sipp investments

One of the biggest hardships for property developers in the wake of the downturn has been the continued constraint on funding. But Grosvenor Financial Consultants has found a novel way of using pension assets to help fund property development in the UK.

The York-based firm has spent the last two years broking bespoke commercial mortgages by using its clients’ Sipps to fund the projects, culminating in the development of a £6.7m luxury seaside hotel. It hopes to build on the project and continue to aid developments through pension funds.

Director Mark Pepper says the idea of using Sipp money to invest in bespoke projects had been with him for a while but it was not until the credit crunch that he saw the need for such a scheme.

“We had a lot of cash on deposit so, from a client perspective, there were very few assets you wanted to put their money in because of the huge scares and the levels of volatility at the time. But also there simply was not any money out there for investment, the credit world had dried up.

“The relevance of picking pensions was timely because we had frozen credit and at the same time Sipp investors wanted to get better rates on their money.”

Pepper and his firm went about creating a proposition whereby they could act as a facilitator between their Sipp clients and property developers in need of cash injections. Using a solicitor to avoid any conflict of interests, they began matching investors with developers.

Pepper says: “It began with us doing little deals between people who knew each other and it quickly became apparent that we had quality clients, largely in construction, who needed to borrow money.”

He says the IFA began to see more of its clients getting interested in such investments. “It was showing Sipps in their rawest, generic form as a flexible, tax-efficient vehicle and people started to grasp it. The problem is too many people end up with a tax-efficient, poor-performing funds as Sipps and we are trying to get away from that.”

The big opportunity came with a property development called Raithwaite. It had an option premium on 80 acres of prime land on the North-east coast, where it wanted to build a five-star hotel. It applied for permission before the crunch but received a green light ahead of schedule just as the banks began to stop lending.

“They were faced with forfeiting the large option so they came to me and I said we could do this, mainly because I knew they had already pre-sold most of the hotel.”

Pepper: ’Pickingpensions was timely because we had frozen credit and Sipp investors wanted to get better rates on their money’

Pepper and his firm then worked with the developer to find a reputable construction firm for the hotel. He says: “We wouldn’t allow a cowboy to build the hotel, we insisted on a AAA constructor.”

Grosvenor found one and its own lawyers agreed that the proposition was sound.

Pepper and his other directors then embarked on “the mother of all roadshows” around the UK and beyond, talking to their Sipp clients about the investment. He says: “It was a great way to see your clients and it was a great story to tell.”

Grosvenor eventually raised enough investment capital from its clients to create two tranches of £3.2m and £3.5m respectively, using at least £50,000 from Sipp investors. The first was used to buy the land in summer 2009 and the second was drawn down in July 2010 to begin construction on the hotel, which is set to open in summer 2011. Pepper created the deal with the help of Hornbuckle Mitchell, which he says has been “awesome” in helping the firm create the proposition.

He says: “I have not heard of other IFAs doing this type of deal yet but I do think we will see other advisers doing this. That said, it must not be underestimated how much infrastructure you have to put into place to protect the client and you cannot be careful enough. We stress-tested this and looked everywhere where this could go wrong.”

Pepper says his firm has been able to grow significantly from these deals and is now concentrating on facilitating more projects. The Raithwaite project has already been extended and Grosvenor is in the midst of creating two more tranches to fund another three years of further development on the site. The firm has even gained a mortgage adviser, who joined Grosvenor after referring interested pension investors onto the firm.

Pepper says: “It has been a fantastic way of building the business. These sort of deals are a natural progression for IFAs with Sipp clients. This funding climate will not change for years so there are a lot of opportunities for Grosvenor.”

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