How to get around the Sipp property rules

Gordon Brown’s U-turn on self-invested personal pensions (Sipps) came as a nasty shock to investors hoping to snap-up buy-to-let property or second homes with 40% tax relief. The chancellor’s ban on Sipps including residential property, as well as other assets, such as wine, vintage cars and works of art, came too late for many – leaving an estimated £5bn in limbo awaiting investment.

So where’s all the money going to go now that it isn’t allowed to pour into the holiday-home market? Given the British obsession with investing in property, we suspect that it will still be seeking a home in the sector – only less directly.

Property SIPPs: property-linked investment funds

Investors who insist on doing so (regular readers will know that MoneyWeek is very bearish on the UK property market) will still be able to play the residential market through property-linked investment funds held within a Sipp. This was arguably always a better idea anyway: funds can be bought and sold instantaneously, you only need a fraction of the capital to invest, there are no complicated conveyancing or legal issues to address, no mortgages to secure or property chains to investigate, and, of course, instead of just owning one high-risk holiday home, you gain exposure to a range of different properties rather than just one, says Paula Hawkins in The Times. Diversification is never a bad thing when you are dealing with assets as risky as property is today.

Abbey has been one of the first off the blocks in this market, making a big play for investors whose dreams of putting their home into their pension funds have been flouted, says Richard Lander in The Daily Telegraph. The Abbey House Price Plus fund aims to outperform the Halifax House Price Index, after all the charges are taken into account, by investing in property derivatives over a three to five-year term. Although performance is not directly linked to the Halifax index and there are no guarantees, Mike Brown, head of business development at Abbey Financial Markets, is confident of the fund’s appeal – given that, in or out of a Sipp, it means not having to deal with “void rental periods, difficult tenants, maintenance costs, time spent managing the property or the high initial capital outlay and substantial start-up costs”. The minimum investment for the fund is £3,000 and it qualifies for most Sipps, Isas and Peps. Another to consider is the Schroders Residential Property Unit Trust, although to invest in this fund you’ll need to have at least £32,000 and you can only buy in through an independent financial adviser, says Lorna Bourke on Citywire.co.uk.

Assetz, the property investment group, is getting in on the game too. It has recently launched the UK Residential Property Short Term Capital Growth fund and promises the annual management fee will be no more than 1%. On the downside, says Hawkins, you may find you have to pay up-front fees of 3%-plus (a lot, given that few people expect the overall market to grow much more than that this year) and the fund is also not authorised  by the FSA, which could be a concern. 

Property Sipps: Investing in European property

Outside the UK, ARC is jumping on the bandwagon with its European Property Fund and, unlike Assetz, is boasting of being “the first FSA-authorised fund to include residential property in its investment strategy”. With a minimum investment of £5,000, ARC promises exposure to the “buoyant residential property markets of Spain and Germany, as well as emerging markets such as Croatia, Greece and Turkey”. It aims to deliver a pre-tax investment return of 8% a year over the medium term. This sounds good, but note that, as is so often the case, it may well not be much of a deal. Investors who read the brochure properly will find that they are to pay a 6.5% initial charge and a 2.5% annual management fee. What’s more, if the ARC fund managers outperform their annual target of 8% returns, they will receive 20% of everything over that target 8% as a performance fee.

It’s also worth wondering if these so-called “buoyant” European property markets are really likely to return much more than those in the UK. The Croatian market has been on the up for so long that it can hardly be considered cheap anymore, while PricewaterhouseCoopers’ recent annual report, Emerging Trends in Real Estate: Europe 2006, warned that Spain’s property markets are thoroughly overvalued. Indeed, even Otmar Issing, the European Central Bank’s chief economist, recently told Bloomberg that, “for a number of countries, such as France, Ireland, Spain and even Italy, house prices are on a path that is not sustainable”.

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