Investors using their pension pots to back property investment
INVESTMENT levels in Northern Ireland's commercial property sector appear to be on the increase again after a slow start to the year, as the funding options for those seeking to invest also expand.
After falling by more than a half to £213 million across 2016, the latest market forecasts suggest that figure could be surpassed in the third quarter of this year alone, with over £200m worth of deals that are currently being negotiated expected to complete over the summer months.
The senior lender market remains very competitive, given the limited opportunities to put money into appropriate commercial property transactions. We have also seen a more varied pool of funding options emerge over the past 12-24 months outside of traditional senior debt, especially for opportunities that bit further up the risk curve.
As the statistics demonstrate, the macro climate has stifled activity somewhat, despite the expanding funding market. However, one sector where we have seen continued strengthening of demand has been in the sub £3m pension investor market.
In light of historically low interest rates and concerns over potential fluctuations in the stock market during an uncertain Brexit negotiation phase, investors have turned to “bricks and mortar”.
Recognising that the wider fundamentals remain positive is important, especially in the context of the property market's modest growth post-recession, with analysts using that all important phrase in relation to the outlook - sustainable.
This sense of stability has led many investors into a market with limited product, which has resulted in significant levels of competitive tension for opportunities deemed suitable for SSAS and SIPP purchasers.
SSASs (Small Self-Administered Schemes) and SIPPs (Self-Invested Personal Pensions) are two of the most prevalent pension products, designed to allow business owners and high net worth individuals to develop bespoke investment strategies for their retirement fund.
They are considered attractive because of the flexibility offered to scheme members to take control of their own pension arrangements in terms of the breadth of assets they can invest in, and the freedom given to make that choice.
There are also considerable tax benefits associated with the schemes such as, in the case of a SSAS, the ability of the pension pot to grow as it accumulates tax-free rent from the leasing of the building.
However, there are several key differences between the two options.
For example, while SIPPs are an individual pension arrangement, SSASs are occupational pension schemes established by an employer typically for the benefit of directors, key employees and their families.
Unlike SIPPs, which have only one member, SSASs can have as many as 11 participating within one scheme. For multiple members of the same company, this makes them a cost-effective option, especially when a property purchase is involved.
There is also a major variance in how the two products are regulated, with anyone wishing to operate a SIPP first required to apply to the Financial Conduct Authority (FCA) for approval.
A recent tightening of regulations, meanwhile, means SIPP operators are now required to categorize assets as either standard or non-standard, with investments which are not readily realisable within 30 days falling into the latter category.
Neither is true of SSAS schemes, which also offer a greater degree of control to their members, each of whom is a trustee in their own right. In the case of SIPPs, trustee responsibilities are assumed by the provider of the scheme.
With the use of these pension instruments added to an already compelling narrative around investing in commercial property, we expect activity levels in this sector to remain consistent, with the biggest challenge being finding the product to service demand.
:: Declan Flynn is managing director of Belfast-based commercial property agency Lisney, which works on behalf of many of Northern Ireland's most significant investors and developers as well as major retailers and businesses.