Investing Scheme assets in property: the essentials

21 / 12 / 2016

“Safe as houses” is an axiom which resonates across cultures, and has an impact on pension investment. Although SIPPS can’t invest in residential property, UK commercial property is an important asset class for trustees and advisors to consider.

There are two features of the property industry which are peculiar to the UK and merit especial mention.  First is the so-called “FRI lease”: a full repairing and insuring lease means that the tenants pay all the cost of maintaining and repairing the building, in addition to the rents.  This is sometimes called a “triple net” lease.  Other jurisdictions require the landlord to repair structure of the building using income from rent, or make the seller liable for some wants of repair event after the sale has completed.

Second is the upwards only rent review, prevalent in the UK despite its unpopularity with tenants.  Typically the rent payable by the tenant is reviewed to the market level every five years, ensuring the rent received by the landlord keeps pace with inflation.  The benefit (for building owners) is that leases tend to be written on terms which mean the rent payable by the tenant will not fall, even if the market rent has fallen since the lease was first granted.

The combination of these factors produce a robust return profile for investors.

Of course, past performance is no guarantee of future returns.  Lease lengths in the UK have fallen over time; the rent is payable only as long as the lease lasts.  This means there is less certainty with regards to returns.  Property investment has transaction costs and takes time to transact.  Looking to the future, trends such as co-working space and the growth of freelancing is likely to reduce the demand for offices themselves.

This means that any investment into UK property requires expert advice.  Our commercial property team are used to working for investors of all sizes, and can recommend other relevant professionals.