Thursday, September 15, 2005

Abbey climbs in with Sipp product

Some financial advisers are predicting investors will pour billions of pounds into residential property through their self-invested personal pensions (Sipps) when this becomes possible for the first time next April.

The change in the law effectively gives you a tax break to buy residential property, although borrowing is restricted to 50 per cent of your pension pot.

But putting a residential property in a Sipp may be inappropriate for a large number of people; given current high prices for property, investors with modest pension funds may find putting just one property in their pension gives them a disproportionate exposure to this asset class.

As a result, financial groups are likely to come up with imaginative ways to allow property investment on a smaller scale.

One of the first off the starting blocks is Abbey, the bank, which with Knight Frank, the property agents, has devised an intriguing new product. The Abbey Residential Property Plan is a derivative based on the Halifax house price index which gives people exposure to the property market without requiring a direct investment in property.

The fund is not entirely new. Abbey has launched a similar product before through a partnership with Newcastle Building Society. But this was a deposit structure, while the new “plan� involves the purchase of shares in a Dublin-listed company. This gives investors tax advantages whereby they pay capital gains tax at the end of 10 years rather than income tax.

Under the new scheme, investors must put in a minimum of £3,000 and must remain invested for 10 years during which time they receive no income. At the end of the period Abbey pays out the original investment plus double the growth in the Halifax index during the period. If house prices fall over this period, the plan is designed to provide full repayment of the original investment.

The product has the advantage over buy-to-let in that it makes residential property accessible to those with more modest sums to invest. It also avoids the hassles of dealing with nightmare tenants, maintenance problems and all the usual hurdles of being a landlord.

The new fund promises double the returns of the Halifax house price index. Yet buy-to-let investors are also likely to make more than the index given that they tend to borrow a large amount of debt, giving a geared return.

In addition, investors in the Abbey product will miss out on the rental yields which an owner of bricks and mortar could expect to receive – still about 5 per cent gross, or 3.5 per cent after costs.

Under one model of the Abbey product, if £10,000 had been invested 10 years ago, the payout at maturity would have been £43,400, because the Halifax index grew 167 per cent.

This is certainly not a return to be sniffed at. Yet imagine your £10,000 had been invested in a £100,000 apartment in 1995, after borrowing £90,000. If the property appreciated in line with the market, it would now be worth £267,000. Assuming the £3,500 of rental income is used to service the debt (a conservative assumption given that until recently, UK rents tended to cover mortgage repayments with room to spare), the buy-to-let investor would have turned £10,000 into £177,000 (the new value of the house minus the debt). This is clearly a superior return to the Abbey product, but given the gearing, entails significantly more risk.

However, such modelling may be irrelevant given that 1995 to 2005 was an exceptional period for the UK housing market. Looking ahead, it would be an optimistic – perhaps foolhardy – commentator who predicted similar growth.

Yet Liam Bailey, head of residential research at Knight Frank, is optimistic that prices will continue to rise in the medium term. Constraints on supply in the UK make a substantial fall in prices unlikely, he argues.

Mike Brown, head of retail business development at Abbey, argues that the product has advantages over other forms of property investment. Shares in property companies fluctuate depending on stock market sentiment, property unit trusts are often open only to institutional investors or high-net worth individuals and property syndicates are vulnerable to disagreements and strife, he argues.

But it is rather ironic that the Abbey product is being targeted at Sipp investors ahead of next April’s change in the law. Because it is a financial product, it does not constitute a direct investment in “residential property�. It could therefore have been bought by pension investors ahead of next year’s changes to pension rules.

In effect, “A-Day� has not given Knight Frank and Abbey a market opportunity so much as a marketing opportunity.

Sipp info from FT


At 11:50 PM, Blogger creditandmortgageindex said...

The new fund promises double the returns of the Halifax house price index. Yet buy-to-let investors are also likely to make more than the index given that they tend to borrow a large amount of debt, giving a geared return. Bad Credit Loans, Home Mortgage, Home Loans.


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