Since self-investment was first offered to pension investors through small self-administered schemes (SSASs) in the late 1980s, directly held commercial property has been a stalwart of the asset classes, popular particularly with the owner-managed business keen to use their property funds to own the premises from which the business would trade.
While there have been economic cycles when popularity has waned, demand for the asset class has been strong of late and this now follows into Sipps, which since 1995 have grown in popularity to such a degree that the bespoke versions outnumber SSAS by a ratio of around six to one.
Is a house a home?
The definition of commercial property is simply that which is not residential and, as a result, the range of these assets is wide. As well as the expected industrial units, offices and retail premises, Sipp investments can be diverse, from fisheries to fire stations and boathouses to bistros. Indeed it would appear that only the imagination limits what might be an acceptable commercial investment.
Unfortunately, the imagination of some investment promoters has been working overtime with some of the promoted investments into the likes of biofuel plantations and off-plan developments being little more than scams. Even some of the better structured arrangements have failed and when this does happen administrative problems for the holding Sipp operator occur.
This was obviously in the mind of the FSA when it first penned the consultation document proposing to increase the levels of capital adequacy for Sipp operators in November 2012. Its publication, CP12/33, sought to divide asset classes between those regarded as standard, and all other asset classes deemed as non-standard. The publication went on to contend that non-standard assets might significantly increase the costs of a Sipp operator in a wind down scenario and as such should command a premium leading to the need for a higher level of additional capital adequacy being required depending upon the percentage and value of such non-standard asset held.
The industry’s consultation response is well documented as is their challenge to the FCA, which published PS14/12, based on the new capital framework of the originally proposed value and designation of assets held, but the one notable amendment from CP12/33 was the redesignation of UK commercial property as standard rather than non-standard asset.
PS14/12 states, “Consultation feedback, further informed by our thematic work in the Sipp industry, has led us to agree that normally UK commercial property can be transferred between pension providers at relative ease.”
Key to the point in question is reference to the transfer of property rather than its sale as may have been implied in the definition of standard assets which refers to the need for the asset to be realised within 30 days.
The amendment came with a caveat, which was that if the Sipp operator had reason to believe the transfer could not take place within 30 days, it was required to treat the property and value of it as a non-standard asset.
It is this caveat that has split the industry and now creates uncertainty, a matter that must be addressed before the end of this calendar year so as to ensure Sipp operators are applying a consistent approach to existing and new business.
