How to Invest Your Pension in Property
The property market has traditionally provided very healthy long-term returns to investors. Buy-to-let has been the weapon of choice for many. However, the increasing tax burden of buy-to-let is driving investors to look for other, more tax efficient ways to get these returns.
Holding buy-to-let property in a SIPP isn’t a viable option because of the punitive tax charges that are incurred. And holding property directly in a personal pension isn’t allowed.
So where can you use your pension to invest in property?
UK Property Funds are Problematic
Traditionally Unit Trusts and Open Ended Investment Companies (OEICs) have provided a convenient investment vehicle for anyone wanting to invest in UK property.
But the move by a number of UK property fund managers to change the charging structure, impose ‘Fair Value Adjustments’ or even suspend trading of their unit trust/OEIC funds have effectively closed down many investment opportunities.
These moves have been made in response to net outflows due to a surge in redemption requests caused by worries about the fate of their property funds and the tumbling price of the pound.
Large-scale outflows cause problems for commercial property funds because they are based on assets that are difficult to sell quickly when investors want their money back. Restrictions on withdrawals are then put in place to give fund managers time to sell their properties. Otherwise, they would be forced to sell assets at fire-sale prices to fund the redemption requests. That would drive down the fund’s value, encouraging more investors to cash out, creating a vicious circle.
We have therefore been taking a fresh look at property fund opportunities, and the best performing property funds recently have been global funds, as opposed to UK-specific funds, and focussed on commercial property, as opposed to residential property.
Top 10 Global Property Funds
Here are the Top 10 funds in the market at the time of writing, based on their cumulative performance over the past three years:
Premier Pan European Property
BlackRock Global Property Securities Equity Tracker
Fidelity Global Property
F&C Property Growth and Income
First State Global Property Securities
Mayfair Capital Property Income Trust for Charities
Schroder UK Real Estate
Schroder Global Cities Real Estate
HSBC Open Global Property
Schroder Global Real Estate Securities Income
There are still opportunities in the UK market but these REITS tend to be specialist funds, focussed on specific sectors such as student accommodation and healthcare.
Residential Property Growth is Shifting Away from London
For residential property investment, one company we like is Newcastle-based Grainger PLC. Established in 1912, Grainger Trust was established to acquire and manage tenanted residential properties in Newcastle. It changed its name to Grainger plc in 2007, and is now the UK's largest listed residential landlord, although not strictly/formally recognised as a REIT (Real Estate Investment Trust). They did partner with APG Strategic Real Estate Pool ("APG") to form the GRIP unit trust in January 2013, which by chance converted in to a UK REIT ('GRIP REIT PLC') just last month.
Grainger PLC owns a large portfolio of rental properties across the United Kingdom and invested over £100m in new and existing rental accommodation in the past year. They have expert property management teams in Newcastle, London, Manchester and Birmingham. By contrast, GRIP REIT PLC is focused on Greater London.
Our caution here is that the London property market has experienced an abrupt halt to its previously relentless growth, with property sales in the most expensive neighbourhoods of London having more than halved in the run-up to the EU referendum compared with the same time last year.
This is reflected in Foxtons, the major London-based estate agent, reporting a 42 per cent fall in pre-tax profits, scrapping its special dividend and reviewing its expansion plans. Foxtons doesn’t expect a recovery in the London residential market this year, and warned that the housing market would remain slow.
On balance, we believe that Grainger PLC may be the better/safer bet, based on its broader geographical spread of residential properties and its widely respected longstanding pedigree within the property sector.
If you would like to chat about your portfolio please contact us on 0800 989 0029 or contact us to arrange an appointment.