Should member-directed pensions invest in commercial property?

Phil Clarke, technical services manager at Rowanmoor Pensions, looks at how pensions schemes can take advantage of opportunities in the recovering property market.

There have recently been a number of articles in the trade press, where the question has been asked, "Is it the right time to purchase commercial property?"

The period from 2007 to 2009 saw prices fall by around 4O% p.a. and it could be argued that the market had bottomed out and that the only way was up. Nevertheless property does appear to be a recovering market and indeed many rental yield and have now increased to 8% whilst capital values have increased by around 11%.

During the recent recession, rental values decreased, as struggling companies found it difficult to meet rental commitments. Demand for commercial property therefore dropped accordingly, but as is evidenced above it is contended that the tide is now turning and the trend is for commercial properties to provide a consistent and increasing level of return. It is also argued that such properties have inflation-hedging characteristics, as rental increases tend to be inflation led and their value may rise.

There is also the potential for long-term growth.

Should member-directed pension schemes therefore be actively seeking to invest in such properties, and what are the advantages? A Small Self-Administered Scheme (SSAS),

Self-Invested Personal Pension (SIPP) or Family Pension Trust can purchase commercial property and there are numerous tax advantages in doing so. A scheme can purchase a property from anyone but by far the most popular route is from a company or business connected with the pension arrangement. The property must be independently valued and this is the amount the scheme must pay.

As prices are starting to recover, now may be a good time to consider such a purchase.
There are a number of advantages:

• The business will receive cash from the scheme, which may be extremely useful as the country emerges from recession.
• In the event of the business failing, the property is ring fenced from creditors.
• The business becomes the tenant; therefore the rental income is paid to the scheme as invested income and also attracts tax relief.
• Any profit on sale of the property is not subject to capital gains tax.
• Finally, the scheme can borrow up to 50% of net scheme assets to assist the purchase.

Recent Government debate surrounding a possible increase in Capital Gains Tax means that now may be the right time to consider moving transfer values in specie into your pension scheme.