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Suffolk Life backs FSA Sipp commercial property stance

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Suffolk Life has backed the FSA’s decision to exclude commercial property from the list of “standard assets” it will reference when calculating capital adequacy requirements for Sipp operators.

Last week, the regulator proposed increasing the minimum amount of capital a Sipp operator must hold from £5,000 to £20,000, with a surcharge for providers holding “non-standard” asset types.

The surcharge for non-standard assets will reflect the additional costs of transferring these assets. The FSA says this is necessary because it takes longer to transfer a scheme containing non-standard asset types.

Non-standard assets will be defined by reference to a list of standard assets. Commercial property does not feature on the FSA’s list.

Following the FSA announcement, Dentons and A J Bell said they planned to challenge the regulator’s commercial property stance.

Suffolk Life head of marketing Greg Kingston says: “We think the regulator has got it right on commercial property.

“It should be a non-standard asset. It is incredibly complex to administer and it is one of the few assets that could deliver negative equity.

“You could argue that for overseas property the FSA could increase capital requirements even more. At the moment there is a 5x multiplier, but given the uncertainties of these investments then extra protection might be required.”

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. I’m all for counter-views by SL but “commercial property is one of the few assets that can deliver negative equity”?!

    Has Greg seen how the stockmarket works? Any investment without guarantee can easily lose money. Commercial property is not all as ‘safe as houses’, but its pretty close.

  2. Call me cynical but doesnt Suffolk Life stand to gain if this gets introduced as smaller providers may have to give up the ghost and sell up?

    Could that be behind their stance on this issue?

  3. Anon,

    Perhaps I wasn’t as clear as I could have been. A good deal of commercial property in SIPPs has borowing attached to it, and by negative equity I mean that it has the potential to leave the SIPP with an overall debt rather than any assets at all. That isn’t just unique for property – it is the same for any investment that the pension fund has borrowed in order to buy.

    I would certainly not describe commercial property as being close to safe as houses, and the regulator clearly shares that view.

    Greg

  4. @ Greg Kingston | 27 Nov 2012 12:04 pm

    Isnt that why you have fixed legal charges and limitation of liability clauses? If the SIPP Trustee takes the proper actions them this risk can be minimised.

    Incidentally how may cases have you seen where negative equity has affected a SIPP?

  5. Negative equity, red herring. why?

    The post A borrowing rule of 50% net asset value means SIPPs cannot over leverage.

    The property is usually leased back to the employer. Rents paid generally go towards reducing debt, thus reducing chance of negative equity. Indeed many loans are scheduled to be paid off in a few years.

    Future contributions are often used first to pay off borrowings again reducing the chance of negative equity.

    Pooling business or family assets often negates completely or seriously reduces the need for borrowing.

    Commercial property values may go up and down but are nowhere near as volatile as say equities. Long term rental yields are more important are generally stable

    Lumping a long term stable incoming producing asset such as commercial property, which I would wager most SIPP investors understand, in with teak trees, holiday resorts, french hotel rooms, bamboo bonds etc is just plain daft and beggars disbelief!

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