Commercial Investment Property Sipps
Many pension investors are currently hovering over a limited amount of commercial properties in an attempt to take advantage of generous borrowing rules for self-invested personal pensions.
Their intention is to take hold of the commercial investment property before more restrictive investment rules are implemented in 2006.
According to data from the Bank of England, lending for commercial property investment deals rose by a record £7.7bn in the first quarter of 2005, and property experts believe the bulk of the new lending was for investment purchases.
“Since last year there has been a substantial rise in the number of investors looking to buy commercial properties to put into their Sipps. In Manchester the number of developments being put into Sipps has risen to 75% from less than 50% a year ago,” said Stuart Law, managing director of a group of property investment companies.
The Bank lending figures, according to Law, reflect the strength of the commercial property market which he states is yielding about 8.5% to 9.5%, compared with 6.7% for residential investment property.
While there may be some concerns of the investment property market overheating, Law points out that, in a year, the average price per square foot of commercial property in Manchester has risen from £135 to £210. He insists that while borrowing costs stay low and many investors remain disillusioned with the stock market, property should benefit from sustained demand.
At present, Sipps can borrow up to 75% of the value of a commercial investment property. However, from April 2006, trustees will only be able to authorise borrowings up to a limit of 50 per cent of the total assets in the pension fund. So, an investor with £200,000 would be able to apply for a loan of only £100,000, giving total funds of £300,000 – not enough for many investment properties.
Chairman of the Sipp Provider Group, Barry Bolland emphasizes that pension funds need to be much larger than before as investors will have to borrow the VAT charge which is charged on many commercial property purchases within the new borrowing limits.
Bolland says, “Pre-A-Day, investors can borrow the cost of the VAT above the existing borrowing limit but the new rules say the VAT has to be included in the amount of money that can be borrowed.”
If Sipp members are looking towards commercial investment property and they need to borrow, they should make sure the deal is completed before April 6th 2006.
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