SIPPs have long been associated with investment in commercial property and this is one of the reasons why there has been such growth in the market over the past 20 years.
Despite its popularity, commercial property investment within a SIPP is complicated. The types of investment can range from a single storey office and barristers’ chambers to more exotic properties such as a football ground or even a zoo.
Each year in England more than 40,000 commercial properties are acquired each with a value in excess of £40,000, but of these only around 1,000 will use a SIPP to acquire them.
There are many ways to hold commercial property within a SIPP; it can be done via a property fund, a syndicated property purchase or directly by the pension scheme. Many investors see commercial property as a safe haven with the continued volatility in the equity markets.
Historically investors have tended to buy a fully refurbished property, but there is a growing trend of investors now looking to gain investment returns by buying a property and then developing it using pension fund monies. As with the residential property market, there are many opportunities to purchase buildings that are run down and in need of renovation.
This can take many forms from a simple modernisation of a property to taking on an older building, restoring the period features and adding instant value to the SIPP as the value of the property increases.
One example of this is The Lodge, a property in Lancashire that was purchased by a SIPP in 2010. It was originally built in the 1850s as a public house, but came to the attention of a local financial adviser and one of his clients.
The client in this case was a property developer who was used to taking on large scale renovations, making The Lodge ideal as it had fallen into disrepair over many years and, if left for much longer, would have been beyond repair.
For many investors the thought of a major property renovation would be too much but with the right project team and detailed planning it is possible to bring it in on or under budget in a set timeframe, as was done with The Lodge.
The investor and the adviser are central to the project team. In the example of The Lodge, the investor’s prior experience of project management meant that a hands on approach could be taken, but that is not always the case.
The financial adviser’s role is to deal with the financial aspects of the purchase and renovation. This includes establishing the most suitable SIPP product and arranging for the pension funds to be transferred correctly and in accordance with current regulations.
This is crucial as the renovation is being carried out by the pension scheme and so care needs to be taken to ensure that it is the pension scheme, not the investor, that benefits from the works being undertaken.
