Not many topics of conversation have dominated the finance pages in the national and trade press more than residential property investment. On the one hand it is seen as the saviour of the property market while in other corners it is viewed as a bubble just waiting to burst.
At John Charcol we have always sat firmly in the corner of the former and our own recent research has merely cemented this long-held view.
We found that a staggering 95 per cent of the total buy-to-let stock in the UK is owned by professional property investors, defined as those who own ten or more properties. The report was carried out on our behalf by research agency Mintel and is based on an analysis of existing market data and a survey of UK property investors.
This showed that, far from being built on sand, the buy-to-let market is on much firmer ground than recent warnings have suggested. It is not being propped up by legions of cautious first-time landlords – the market is dominated by professional investors who take a long-term view on their portfolio of property investments.
Countdown to ‘A-Day’
This market is also in line for a major boost with the changes to legislation on 6 April 2006 or ‘A-Day’. Thanks to government changes to pensions schemes from this date, your clients will be able to put residential property, which includes buy-to-let and holiday homes, into their pensions.
This has previously been the privilege of commercial property alone. Great news but there are still many issues that the entire industry needs to be mindful of.
One of the main areas of concern is that people will be putting all of their eggs into one basket and relying too heavily on residential property. As with any investment strategy, diversification is the key to lessen risk.
If the self-invested personal pension (SIPP) is largely invested in residential property, or worse still in just one property, the lack of diversification is clearly inappropriate.
A lot of investors tend to forget to include their own house in their plans and a person’s own property is the one that can easily make individuals overweight in this asset class.
SIPP danger
At present borrowing within the SIPP can be up to 75 per cent of the property value. Post-6 April 2006 the proposal is that the borrowing facility will be reduced to 50 per cent of the fund value.
One danger in holding property within a SIPP as retirement approaches is the lack of liquidity, although this may be less of an issue than with commercial property which typically takes longer to sell than residential property.
Nevertheless, to avoid a possible liquidity squeeze it will be important to plan property sales well before the funds are likely to be needed to fund retirement.
Many current buy-to-let investors will need advice on whether to move their investment into a SIPP and new investors will also need advice on whether that investment should be made via a SIPP. For existing investors one key factor in this decision will be capital gains tax (CGT).
Transferring property into a SIPP will be treated as a disposal for CGT purposes and one’s view on likely future property price growth will be an important consideration in deciding whether property should be transferred.
Investors with accumulated CGT losses might see the opportunity to put their property into a SIPP as a good reason to use up those losses. Cashflow considerations will also be important, not only in respect of any CGT liability crystallised by switching property into a SIPP but also in respect of the different rules for gearing.
The buy-to-let sector is on good ground but what is clear is that there
is much research still to be done and many questions still to be answered on property in SIPPS.
However, there will undoubtedly be huge potential for many in the industry to get hold of this market and write good levels of business on the back of it. We, like many, look forward to that devil which always finds itself deep within the detail
