Property has always been seen as a fairly standard asset for self-invested personal pensions (Sipps). Accepted by more than half the providers in Money Management surveys, it is a far cry from the more esoteric investments hitting headlines in recent months.
Nevertheless, it has recently come under the spotlight for two reasons. Firstly, the regulator’s capital adequacy paper highlighted commercial property as a non-standard asset, lumping it with far more exotic investments for its proposed capital calculation. Secondly, in a surprise move, the 2013 budget announced an intention for ministers to consider allowing residential property into Sipps.
With positive economic signs emerging every other day, property is an asset with staying power – demand is not going anywhere. But how will regulatory meddling affect this area of the market for Sipps?
Commercial considerations
Investing in commercial property is central to many Sipps. The vast majority of this investment is in UK properties, as detailed in Table 1, with 15,025 holdings across 45 providers. Other types of property still attract attention, however, with 1,184 hotel rooms – 1,032 of which are held in the Lifetime Sipp Company – 398 overseas properties and 423 land bank holdings.
The total number of properties across all providers, including those that did not break down their total into the four categories, stands at 28,364. The highest total holding comes from James Hay at 5,025 compared with an average of 630 per provider.
Not all Sipps allow borrowing but, for those that do, the average stands at £119,018 against an average property value of £258,832. There is a vast span of property averages across providers, ranging from £50,500 at the Rowanmoor Group to £686,458 in the JLT Gresham Sipp. Generally, loan sizes are lower than property values. One exception is Carey Pensions. The firm explains its skewed figures by saying its book of business contains a few very high-value properties that have lending alongside many much smaller properties with none.
If the FCA goes ahead with including commercial property in the non-standard assets part of its capital adequacy calculation, it will affect a great many providers and individuals. Its rationale is based on property being an illiquid asset that is complex to transfer or sell if a Sipp operator were to wind up. But, for some providers, this argument falls flat.
“Property has, is, and will be one asset-forming part of any pension scheme’s investment strategy to provide, hopefully, index-linked income and growth,” says Hamid Nawaz-Khan, chief executive of Alltrust. “To classify this as non-standard is bizarre. Yet a property unit trust is acceptable, even though in falling markets fund managers suspend the sale of the units. Thus the liquidity argument fails.”
There have been calls for property to be considered in a different way to other more esoteric assets that have different types of risk. The regulator has delayed its response to its consultation, with the industry hoping this means a closer look is being taken.
“Property is undoubtedly illiquid and slow to transfer in comparison to listed securities,” says Andy Leggett, head of business development at Barnett Waddingham Sipp.
