COMMENT Against a backdrop of dwindling funds in individual savers’ accounts, falling corporate dividends and alarmingly low interest rates, we have seen an uptick in the number of commercial properties being bought by self-invested personal pensions (SIPPs) as people look to stimulate their pensions’ earning abilities.
With some equity markets still beneath their pre-Covid valuations, savings values have been hit repeatedly throughout the pandemic, leaving many facing either working for longer or retiring on less. The combination of low bond yields and decreased interest rates has encouraged many to take control of their own investments and capitalise on the more stable returns delivered from bricks and mortar.
SIPP benefits
Using commercial property to bolster a pension is clearly a desired route for many. The key attraction of using a SIPP to invest is that growth in a property’s value is free from capital gains tax, while also giving the pension a tax-free rental income, along with potential inheritance tax advantages for the individual.
For example, in Cheffins’ September sale, a four-storey retail property in Baldock, Hertfordshire (pictured), saw competitive bidding from multiple SIPP investors, eventually selling for £422,000. With an income of £13,000 pa from a takeaway unit, the property saw an active response from both local investors and those from further afield. A strong underbidder and a determined local investor helped to push the final price to well over the pre-sale estimate of £315,000.
Similarly, a three-storey retail property in March, Cambridgeshire, also saw interest from multiple investors, many of whom were looking to place the property into a SIPP investment, eventually selling for £150,000. Currently let to Holland & Barrett Retail for a rent of £5,000 pa, the property allowed a small but steady return for buyers on a long-term basis.
Coming up in our sale on 2 December, a freehold two-storey detached office block in Peterborough, Cambridgeshire, is set to be of interest to SIPP purchasers. This commercial investment opportunity is currently let at £34,500 pa following a recent rent increase and provides modern, flexible office space. It has a guide price of £350,000 and is being sold on behalf of a property company.
Keeping it simple
Typically, uncomplicated and well-let retail units, industrial units and office buildings appeal to the SIPP purchaser owing to the resilient rental income and potential for capital growth that these types of properties provide.
The Peterborough offering is a very typical purchase for a SIPP investor. With a strong guaranteed yearly income and as a well-maintained building, the property represents an easy investment that could provide greater returns than cash in the bank.
We have seen that the favoured price point for SIPP buyers is under the £500,000 mark, with few of these investors spending more than that amount. This is mainly due to affordability and investors having multiple vehicles in which they place their cash.
While SIPP purchasers do buy commercial property via private treaty, the auction process can be particularly attractive to this type of buyer, mainly because of its hassle-free and immediate nature.
For sellers looking to cash in their assets, the property auction enables a quick release of equity for commercial holdings in a transparent way that can demonstrate that market value has been achieved.
Currently, the market is strongest for industrial or mixed-use lots that guarantee both rental yields and capital growth. And while there has been much talk of the coronavirus pandemic’s effect on the retail market, units in good locations offered with reasonable reserves are still seeing strong interest from purchasers.
As pension pots diminish further, we forecast that we will see a continued increase in the number of individual investors who look to diversify incomes and make the most of the potential tax benefits that commercial property ownership offers.
Ian Kitson is a director at Cheffins
