At a time when final benefits pension schemes continue to decline, people are now far more aware of the need to provide for their future. Technology is making information and investment products much easier to access.
So there could be a growing pool of potential commercial property investors looking to take more control over their savings. But how can they gain access to the market? EG brought a panel of experts together to explore some of the routes to becoming a commercial property investor.
Investing through a wealth manager and the Sipp
Doug Ryan
Wealth management director,
Mattioli Woods
• In the wealth management industry, commercial property is a vitally important component in any discussion – whether already owned or with a view to buying. But the wealth management industry is perhaps not as focused on this as it should be, owing to the way many wealth managers are remunerated and the complexity of buying commercial property.
• Commercial property has been purchased by pension funds since the late 1970s, with business owners typically looking at commercial property to occupy and using their pension fund assets to purchase it, creating significant tax advantages. However, the focus has shifted away from that slightly over the years owing to the way that advisers advise on suitability, the regulatory requirements attached to pension funds, and the need to have the right structures in place to be efficient when purchasing property through a pension provider.
• But the tax advantages mean it is well worth overcoming the obstacles and certain areas of the market do allow for very efficient manoeuvring of commercial property into pension schemes. Preparation is key and having an adviser able to make sure that the provider is fully aware of the objectives of the member (especially around retirement) and how that fits into the overall portfolio.
• Can the auction timeframe – immediate exchange followed by completion within 28 days – fit the pension fund investor? Yes. But it does require a collaborative approach involving adviser, provider and legal team.
• The tax advantages are significant as pension funds benefit from tax relief on any contributions. Any increase in the value of an asset is free of tax if sold and any rental income is also free of tax when received. And, importantly, pension schemes are ultimately outside of the estate for inheritance tax purposes.
Investing indirectly through a REIT
Richard Shepherd-Cross
Managing director,
Custodian Capital
• Custodian Capital, a subsidiary of Mattioli Woods, is a property investment and management business.
• The key points for investors to consider when thinking about commercial property investment are: quantum (how much do you have to invest?); longevity; risk and return; diversification; and liquidity.
• Prior to establishing Custodian REIT in 2014, Custodian Capital managed £100m of assets for private clients in syndicated structures. This provided exposure to commercial property and positive income returns, but inadequate diversification and liquidity. The aim in building the property investment strategy for Custodian REIT was to provide long-term, sustainable, income-driven returns, particularly aimed at private clients and wealth managers. It now manages £500m of commercial property.
• Investors tend to invest through platforms or through private wealth managers. The portfolio is spread across 160 properties and over 200 tenants, comfortably addressing the need for diversification.
• The structure chosen by Custodian was a REIT or closed-ended fund. Investors buy shares which are traded – usually on the London Stock Exchange, sometimes on AIM – so there is always liquidity. Investors will experience short-term volatility as share prices move daily, as seen keenly over the last year. However, over the long term, it should be expected that the share price will track very closely the underlying value of the property. So with a low-risk property strategy and low gearing, returns of 5% to 7% per annum over the long term would not be unrealistic. That is in line with direct property investment returns but with the benefits of an easy access, fully managed portfolio offering diversification and liquidity. So it’s a very real alternative for those who can’t afford a whole lot more.
Investing directly through the eyes of a solicitor who acts for numerous private investors
Vijay Parikh
Managing partner,
Harold Benjamin
• For those who are looking for direct investment opportunities, Parikh has found auctions to be far more advantageous than private treaty, providing both access to the market and certainty to the private investor. He cites the example of a client who was seeking to buy a property let to Tesco, which was being marketed through an agent in the West End. Because the investor lacked a track record in commercial investment and lacked a relationship with the agent, he was taken through a process of best bids and final offers and was ultimately unsuccessful in buying the property. However, the client went on to buy several properties through the commercial auction room – and felt happy with the price paid and the process.
• The key advantages of auction, says Parikh, are access to the market – whether the investor is based in the UK or overseas – and a level of certainty that is simply not possible in private treaty, even if the vendor accepts your offer. In private treaty, there is still the opportunity for the vendor to pull out, because the deal is subject to contract, or for the buyer to renegotiate. But at auction, investors can have confidence that when they are the highest bidder, they will acquire the property: when the hammer goes down, the deal is done.
• But it does mean that all the fundamental work must take place prior to the auction – having the right legal team on board to review the legal documents and having your funding in place. Parikh has seen that starting the due diligence process as soon as possible once the auction catalogue is out leads to a much higher chance of success.
Investing via the commercial auction room requires expertise
Richard Auterac
Chairman and auctioneer,
Acuitus
• The commercial auction room is the domain of the expert investor with funds available and an appetite to test their asset management skills. Commercial investment is not for the novice. But Auterac says there is a huge opportunity for the newcomer to acquire the skills and the knowledge of those few. Investors need to understand both commercial property and the finance aspects – either by acquiring the skills themselves or by using experts in asset management or wealth management. There are a number of other factors which are important for the newcomer…
• Auction has a unique role to play in bringing investable product in front of investors. The last 12 months has seen a dramatic shift to online delivery by auctioneers and the acceptance of the investor community to buy online has been one of the greatest successes that has happened in the sector – and that will undeniably grow over the coming years.
• It is vital that auctioneers provide reliable and comprehensive information for the buyers. Acuitus wants buyers to come back again and again throughout their time ‘in the market – so an effective working relationship between the surveying profession and the legal profession is crucial. When it comes to the issue of due diligence and analytical tools by third parties, Auterac sees a huge opportunity for technology to move things forward as it has done in other markets.
• A whole new range of financial products will be coming out to help the private investor – in particular, helping to deal with the relatively short time span between exchange and completion. Acuitus itself has teamed up with specialist property lender Octopus Property to develop a pre-approved, non-regulated bridging loan product for investors who buy at Acuitus auctions. The product is designed to address the mismatch between the amount of time required for an investor to complete an auction purchase and the time taken for a traditional loan to be approved.
• Finally, trust and transparency are crucial. Acuitus has worked hard over many years with the RICS to develop the highest professional standards which are set out in its guidance and are regulated. The firm believes that having those professional standards is what clients – whether they are experienced or newcomers – want to see.
To send feedback, e-mail julia.cahill@eg.co.uk or tweet @EGJuliaC or @EGPropertyNews
