The current low inflation and low interest rates also mean that property can offer attractive yields depending on the type of property and tenant. Current yields on recent non land only property acquisitions have been in the range of 5-8% per annum. Capital appreciation on property has also been strong with capital returns averaging over 10% per annum, according to the Industrial Property Database All Properties Index.

Many investors like directly owned property due to its tangible qualities. Property can be seen and touched and rental income viewed through regular rental receipts. A property when correctly purchased with good title and provided it remains insured will always have a value irrespective of economic events and this can provide comfort to the investor.

Commercial property need not be restricted to the conventional offices, shops and industrial units though. Bars, restaurants, night clubs, hotels and snooker halls as examples could all potentially be held within a SIPP and leased out to a business whose rent provides the investment yield on the asset. The tax advantages are also clear as rent is received free of income tax and increases in capital value are exempted from capital gains tax.

Some believe that the acquisition of a direct property is out of reach of many smaller pension funds. Recent reduction in permitted contribution levels have meant that building up pensions cannot be achieved as quickly as it could have been in previous years. Similarly the amount that a SIPP can borrow to assist in property acquisition has been reduced to just 50% of the value of the SIPP at time of purchase. It is however possible for two or more SIPPs to pool together and purchase an asset jointly. So too is it possible for a property to be acquired in several stages, particularly when being purchased from a connected party. In such circumstances, each party would receive the proportion of the rent equivalent to the same proportion as their ownership.

A commercial property acquired through a SIPP, and leased back to an individual’s business can also offer attractive options. Not only would the purchase release cash from the pension to the business, perhaps to help the business grow, future rental payments are a business tax deductible expense which are paid effectively into another pocket of the individual’s wealth and retirement plan.

Commercial property ownership is not without its risks. These include a lack of diversification if, for example, the SIPP holds only one commercial property asset. In the event of a tenancy void, without rental income the asset can become a liability. Continuing expenses of business rates, property insurance, SIPP fees and if borrowing is in place, mortgage repayments will still need to be paid and if other liquidity within the scheme doesn’t permit, member contributions may be required. In the worst case scenario, it may be necessary to sell the property.

A property is also a largely illiquid asset and cannot easily be turned into cash. For this reason, an investment strategy should be followed which allows accumulation of sufficient liquidity through rental receipts and contributions that permits payment of benefits as they fall due.

However popular as a personal investment and future retirement asset, residential property is not an acceptable investment within a SIPP. Despite proposals for its inclusion made pre ‘Pension Simplification’ in 2006, directly held residential property is still regarded by HMRC as a taxable asset and penal tax penalties apply. Care should be taken when considering any property that could potentially be used for residential purposes and those that might have mixed use such as bed and breakfast hotel or a public house with accommodation.

In summary, direct commercial property investment is not for the inexperienced investor, nor one averse to risk, but can be attractive for those understanding the asset class and looking to have greater control over their pension investments.

Martin Tilley is director of technical services at SIPP provider Dentons Pension Management

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