After months of chaos and confusion following Gordon Brown’s U-turn last December, the first swathe of investors is starting to channel pension funds into residential property through new types of syndicates.
Under the final version of the Finance Bill, which was passed last week, investors can get exposure to residential property through their self-invested personal pensions (Sipps) as long as it is through a so-called “genuinely diverse” investment vehicle. These schemes have to fit certain criteria: they must have at least 10 investors and own at least three different properties worth a minimum of £1m in total.
A number of new schemes have emerged on the market to target newly available Sipp money; and they are filling up fast. Property Bourse, the first UK company to source and manage a portfolio of residential property syndicates aimed at pension investors, already has four schemes. One is about to close to initial investment having secured £1m.
Property Bourse provides a market framework for wealthy investors looking to get in and out of these types of scheme. It works with property professionals to set up investment schemes in areas where it sees opportunities. It then brings in asset managers and provides detailed, comparative information for investors.
Robin Christie, managing director, says: “The new regulations are hugely exciting and give wealthy investors more of a chance to actively manage their own Sipp. Property syndicates allow individuals to get exposure to more opportunity-driven investments and access to local market expertise.”
He believes these schemes offer investors a clearer understanding of where their money will go and give them more control over their asset allocation.
“Compare these to the murky practices of ‘property clubs’ and private property syndicates where there is no transparency, no comparison and no consistent summary presentation of the offering information,” he says.
Property Bourse has three schemes in the UK and one in Poland. It expects to raise around £12m-15m of equity by the end of the year, from 300-350 investors. The first Sipp-compliant residential scheme, Urban Share, has already generated £1m and hopes to raise a further £3m over the next 4-5 months.
This scheme invests in properties around the Docklands area of London, which were lived in by dockers and manual labourers. The scheme refurbishes the properties and rents them out to young professionals. It has a minimum investment of £12,500 and targets an annual return of 15 per cent.
Other schemes set up by Property Bourse include a portfolio of refurbished houses in Birmingham, which are being let to students, and new properties being purchased off-plan in Poland and let out to professionals.
Advisers also expect a flood of other “Sippable” residential schemes to hit the market now the rules have been finalised. Specialist property investors, overseas developers and other small investment houses could launch vehicles.
Christine Hallett, managing director at Pointon York Sipp Solutions, says: “We believe this area will increase and smaller syndicates will start to be established by entrepreneurial advisers who want to offer a diversification asset class to their clients.”
Property is considered a welcome diversification away from other assets such as equities, fixed-interest securities and bonds. Initially the government had planned to allow Sipp investors to buy properties – such as buy-to-let flats and holiday homes – but this was stamped out in a spectacular U-turn by the chancellor before it ever got off the ground. The government has allowed property syndicates, however, because they require investors to spread their risk while the strict rules mean these schemes are only really viable for more sophisticated, higher-net worth investors.
Tim Whorton, director of LEBC, the financial advisers, is seeing a buzz of interest among clients and has already put a number into the Urban Share scheme. He says a typical investor might put in £25,000-£50,000.
Whorton believes the main advantage of investing in residential property through a Sipp is the tax break. “There are substantial tax advantages of having property in a pension. Rental income is tax free, as is any capital gain made on the property,” he says.
But as more residential schemes are launched, some potentially by less scrupulous management teams, investors must be increasingly prudent when choosing their investment.
Always go for a scheme that falls under the scrutiny of the Financial Services Authority and has a management team with strong expertise and a reliable reputation.
Also, take a close look at the economics of the development. Research the potential yield and the prospects for capital growth and get a good idea of the development opportunities. Residential investment generally means smaller units and shorter leases than commercial so look at who is likely to rent, their financial backing and track record.
Another issue to consider is how highly geared the syndicate is, and whether you are comfortable with it. Schemes typically borrow between 50 and 80 per cent.
