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Property Funds Lure Pension Investors - The Sunday Times Oct 2005

Companies have been cashing in on the growing appetite to put buy-to-let into pensions with the launch of several residential property funds in recent weeks.

From 6th April next year (A-DAY) investors can purchase buy-to-lets and holiday homes with their personal pensions for the first time.

Savers are stockpiling money in anticipation. Standard Life, the insurer, said  last week that more than £1 billion had been invested in its personal pension over the past nine months, driven by the forth coming A-DAY changes.

Investment firms have seized the opportunity to launch residential property funds that are already eligible for pensions. If you invest in a fund, rather than purchasing a property directly, you do not have to wait until A-DAY.

Otherwise the benefits are the same.- You in effect get 40 per cent discount on your investment because the government boosts every 60p pension contribution to £1, assuming you are a higher-rate taxpayer. Income and capital gains are also tax free within the pension fund.

Abbey, the Bank, and Cluttons , the Property Consultant, are among the firms that have rushed out schemes, but advisors say that there is no need to hurry into a purchase now rather than wait until after A-DAY.

Nicholas O'Shea of Pharon, a financial advisor said" Firms are using A-DAY to market their schemes now but it is just a gimmick, Investors need to start thinking about A-DAY, but they should wait until there is a real choice of funds before they invest".

Pension experts also warn that the government may not finalize the A-DAY rules until next year, so it could be dangerous to take the plunge now in case things change.

Curzon Capital, an investment firm, and Cluttons last weekend launched a fund called City Living that will invest in a portfolio of one and two bed City Centre Flats. The fund intends to buy the flats "off-plan" or before they have completed, to achieve discounts of between 5 per cent and 15 per cent.

Developers are also encouraging investors to buy off-plan property themselves in places as far as Dubai, Costa Rica and South Africa.

Assetpool, a financial adviser, last week launched a service that helps you find a property overseas, get a loan and deal with the legal paperwork. The Revenue says you can purchase an actual off-plan property yourself, rather than a fund, with your pension now, provided it is not completed or fit for occupation before A-Day.

However, investors should beware the hard sell by developers. Stephen Ludlow of Ludlow Thompson, an estate agent, said: “While completed properties in new developments may initially fetch 10% to 15% more than older properties, they can lose their premium within months, rather like a new car as it leaves the forecourt.”

The average price of a new-build flat or maisonette slipped 1.2% in 2004 because of a glut of supply, while all other types of property rose in value by an average of nearly 12%, according to Land Registry figures.

New properties may also generate lower rents than second-hand or period homes, which is bad news if you are intending to draw on the income when you retire. “There is intense competition for tenants within large developments, which forces rents down,” said Ludlow.

Meanwhile, Abbey and Knight Frank, a property consultancy, are targeting pension investors with a plan that tracks Halifax’s house price index. Anyone prepared to tie up their money for 10 years will get double the increase in the index plus their capital back at the end of the term.

While a 200% return may sound attractive, the Halifax index is up only 2.5% over the past 12 months, so you would have earned an annual return of just 5%. And Halifax itself predicts that the index will be down 2% this year, in which case you would get a 0% annual return from the Abbey plan.

While there are tentative signs that the housing market is picking up, few commentators are predicting runaway growth

The Royal Institution of Chartered Surveyors said last week that home buyer inquiries in August rose at the fastest pace since early 2004, fueled by last month’s interest rate cut. Sales are up 7.5% since February.

However, most experts are convinced that prices will remain subdued. The Council of Mortgage Lenders, for example, has predicted that there will be no growth between January this year and December 2007.

Jim Ward of Savills, an estate agent, said: “There is no need to rush into the property market as we see an era of low single-digit house-price growth ahead.”

You should also watch out for high fees on property funds that are designed for Sipps. The City Living fund charges 1% a year, which is reasonable, but the annual fee comes out of your income at a time when yields on city-centre flats — which show the income as a proportion of the price — are just 5.5%. Borrowing costs also come out of the rent, so you will be left with no income.

Tom McPhail at Hargreaves Lansdown, an adviser, said: “The cost of running these funds will be high. I suspect investors may be asked to pay charges of as much as 2.5% to 3% a year by some schemes, meaning they will need a total return of at least 10% to make investing worthwhile at a time when the housing-market boom is over.”