Buying a commercial property in your pension fund – too risky?

Posted on: July 11th, 2019

The team at The Pensions Solutions Group (PSG) have been busting some myths associated with commercial property investment as an asset for your pension fund. Below, they give their view on the risks associated with it, and what to consider before you invest:

“No investments are free of risk, but, what are the risks with commercial property? Well, you might buy a real turkey; you might have a dodgy tenant; the market might collapse. Bear in mind, though, that those risks exist no matter how you buy the property. However, some ownership models will nullify those risks, even if they are actually quite small risks anyway.

If you identify the property, it’s probably because you know it’s not a turkey, and if you know you have a solid tenant (quite often the tenant is your company), you can rely on the rental yield too. You can now all but ignore the first two risks. As for the market collapsing? Well, yes that could happen, but even if it did, it’ll also recover if you give it time.

Let’s say you are renting your commercial space. Let’s say you aren’t, you own it through your company and you borrowed to buy it. In both of these cases you are placing unnecessary burdens on your cash flow.

Any borrowing repayments are coming out of taxed income and the property sits on the company books. This impacts on your corporation tax now and your capital gains tomorrow. Or, at best, rent is going to someone else – someone who has the capital value of the building as well as the rental income.

Surely it’s far better to acquire a property using pension funds and borrowing, and then pay rent to yourself? If you repay the borrowing from un-taxed income, you’ll pay it down much faster. You’ll reduce your tax bills today and avoid capital gains should you dispose of the property in the future.”

The Pensions Investment Property Team at Coffin Mew work very closely with PSG to ensure those risks are kept to a minimum. This includes:

Reviewing the valuation report for the property

We will make sure that the proper market value is paid, and check that there are no important assumptions that the valuer has made that are incorrect.

Carry out a title review

We’ll carefully review the title to make sure that there are no unexpected issues that might reduce the ability to use the property, or it’s value. We’ll check that it can be accessed and can be used. We’ll also check whether the pension scheme might be liable to pay anything going forwards.

Conduct searches

We will conduct full searches to ensure that nothing unknown affects the property that might affect its value, or use. This includes things like not having planning consent, whether there are any enforcement notices that need to be complied with, if it has connections to proper services and whether there is any liability for environmental clean up costs.

Commercial leases

We will put in place a good commercial lease that passes responsibility to the tenant for complying with statutory requirements at the property, keeping it in repair and protecting its long term value.

Amanda Read, Commercial Property Partner at Coffin Mew advises: “If you have paid the right price, and made sure there are no unexpected costs that might arise, the risk is limited and calculated. Good quality property that has been properly considered should be a relatively low risk asset for your fund.”

For more information on investing in commercial property, please contact Amanda Read. For enquiries about utilising the potential of commercial property in your pension fund, contact the Pensions Solutions Group here.