The fast-approaching pension reforms which will allow people to draw cash from their pension fund and spend it how they see fit are causing some concerns. Many fear people will take advantage of these new regulations and tax incentives to draw down billions of pounds from poor-performing pensions and then spend that cash unwisely.
Deciding how best to invest your pension money can be a minefield, but many will be looking to put that money into property.
Property is performing well and we have seen unprecedented amounts of cash invested in commercial property over the past 12 months because of huge double-digit annual returns. The residential property market is seeing decent growth and that will also be attractive to savers who are being held back by meagre interest rates with no prospect of increase.
However, individual property investment does have one major drawback. It can be very difficult to unlock that cash when you need it the most and, if you don’t have the experience and insights needed for property investment, it can be a lottery.
Alternatively, syndicated property investment can be a sound bet for people looking to invest their pension elsewhere. Not only does it give you access to a wider pool of properties, but the choice of which property to invest in is entirely yours rather than handing control of your investment to a discretionary property manager. Each purchase is thorough researched with all the necessary due diligence being made available for investors to review and form their own opinion. Here I’ve listed five reasons why you should consider investing your pension in a syndicated property fund.
1. Spreading the risk of your pension investment
By joining a syndicate you can invest your money in multiple properties, which helps to spread any potential risk of tenant default which is one of the main risks with any commercial property investment. The minimum investment is £25,000 and that means you can choose to invest your pension cash in a wide variety of different properties. There is no maximum, but typically people invest around £150,000.
As an added bonus, each property is independently managed, valued and the legal title to the property should also be held in the name of an independent Professional Custodian Trustee, ensuring that the property is protected even if the investment manager ceases to exist.
2. You can sell or transfer your share in the property at any time
With individual property investment, your pension money will be tied up in the property until you can sell it. At best, that means a two month wait for your money should you need it. In reality, you will probably have to wait at least a year to sell the property and get your pension fund cash back.
With syndicated property, an investor can sell at any point and the syndicate as a whole can also decide to sell the property with a 75 per cent majority vote.
Typically, in our case, a holding is sold to another syndicate member or another member of Rougemont’s qualifying High Net Worth client base.
Ideally, syndicated property is a five-year investment, but should you wish to sell, a typical syndicate sale takes just three weeks and Rougemont as the operator of each syndicated property is authorised to assist with this role.
3. Average annual returns of 6-7 per cent on your pension money
With interest rates having been anchored at 0.5 per cent for years and the threat of a further cut now on the cards, savers have been heavily punished during the recession. As a result, most are now looking to take control and find the best returns they can for their pension fund.
Syndicated property investment delivers average returns of around 6-7 per cent and Rougemont Estates is delivering better returns than that.
Each investor receives a quarterly income from the property and also benefits from any potential growth in value of the building.
Total returns on commercial property last year hit 19 per cent and, while it’s unlikely to be as high again this year, investors will still be able to expect double-digit returns when factoring in both income and capital growth, providing they invest in the right property.
4. Syndicated property returns are tax free and offer long-term growth for pension savers
Around half of all investors in syndicated property are using cash from their pension funds as any income or capital gain from the property into their pension is tax free, which is obviously a real benefit.
A typical investor is 45-years-old and is seeking a secure, long-term income that offers the prospect of medium to long-term capital growth. Depending on their age and profile, we find most investors simply don’t want the hassle of playing the equity market every day or having ownership of a single property where all their ‘eggs are in one basket’ and they have to actively manage the property.
5. Pension investors get expert insight and guidance
Perhaps the biggest benefit of investing your pension money in a syndicated property investment is the knowledge that you are getting expert advice and quality investment prospects.
Rougemont Estates minimises risk in this sort of investment by drawing on their years of knowledge and buys properties in prime locations that offer strong prospects for growth through lease renegotiation or property conversion. Rougemont offer the opportunity to it’s High Net Worth audience by way of a detailed investment prospectus. The decision of whether to invest is then up to each investor. Rougemont does not have discretion on any investors funds.
We aim to buy bullet-proof assets. There is still a significant lack of quality stock out there and investors have to be careful.
However, we are confident. We look to operate in a niche area, picking up properties that are too expensive for individual investors but that are too small for the big institutional funds.
By turning to a syndicated property investment company, you can invest in properties in prime locations that benefit from long leases or offer strong prospects for lease renegotiation, rental growth or conversion to an alternative use.
For pension savers, we feel there are some real areas of opportunity within the prime and secondary market where they will be able to benefit from acquiring quality assets that present a real opportunity for growing their cash for the future.
Unregulated Collective Investment Schemes (“UCIS”) have been dominating the financial headlines over the past two years whilst the Financial Conduct Authority (FCA) has grappled with the lengthy process of ensuring that retail investors do not fall foul of inappropriate advice regarding such schemes.
The result of the FCA’s review is a complete ban on the promotion of UCIS and “close substitute pooled schemes” to the vast majority of retail investors in the U.K. and the introduction of a new regulatory framework governing the operation and promotion of such products.
Under the new regulatory framework, investments such as these can only be promoted to sophisticated or high-net worth investors, or to authorised professional advisers..
Non-Mainstream Pooled Investments
UCIS and close substitute pooled schemes – which are collectively known as Non-Mainstream Pooled Investments (“NMPI’s”) – cover everything from syndicated commercial property and unit trusts set up for tax-exempt investors, to investments in fine wine and forestry / timber; all which are viewed as alternative investments. These types of investment have traditionally been perceived as riskier due to the complex nature of some of their fund structures and the fact that many of the schemes have been highly geared and illiquid in nature; however, that is not the case for every type of UCIS.
The FCA’s review of these types of product has been brought about by a large number of retail investors having lost significant sums of money because they did not fully understand the nature and operation of the schemes in which they were encouraged to invest. In many cases investors had not benefitted from appropriate advice on the suitability of such investments, particularly having regard to their personal circumstances and investment expertise.
However, the FCA has also recognised that some of these schemes do have significant benefits for certain investors, hence the arrangement whereby investors can declare themselves sophisticated investors or high-net worth individuals, thereby enabling them to continue taking advantage of alternative investments.
Alternative Investments
When it launched 5 years ago, Rougemont Estates recognised the importance of being an FCA regulated company and it dedicated significant time and resource to becoming appropriately regulated.
Whilst the new statutory regulations may seem like a major headache to many, they are welcomed by Rougemont as they deliver a long awaited legal obligation on all promoters of such products to provide a uniform high level of transparency in their dealings with investors.
Therefore, there is now a regulatory as well as moral obligation on business operating in this sector to ensure that investors know just exactly what it is they are investing in, what the benefits and risks are of the investment, what return they will receive and when, and what fees the promoter of the product is making from the investment.
Despite these new changes syndicated commercial property investments are still viewed as a riskier alternative asset investment and whilst Rougemont is regulated by the FCA, their actual investment promotions are not; this means that investors may not be protected by either the Financial Ombudsman Service (FOS) or the Financial Services Compensation Scheme (FSCS).
However, with an investment in tenanted commercial property investors always retain the value of the land and buildings. Clearly, the main risk is that the tenant becomes insolvent and defaults on its lease obligations; therefore, careful assessment of the tenant’s covenant strength combined with detailed due diligence into the terms of the lease and a rigorous appraisal of the quality of the building itself, its geographical location and its potential for alternative uses are all considered prior to an opportunity being promoted.
Syndicated Commercial Property and liquidity
A major benefit of investing in syndicated commercial property is the freedom for investors to participate in a wide range of well researched, high quality, tenanted properties. Investors can choose to have their commercial property exposure in just one, or a range of diverse property classes and tenants, whilst at all times retaining ownership of their specific pro – rata share of the actual property itself. Syndicated commercial property provides an investor, wanting to invest in commercial property as part of a balanced investment portfolio, the opportunity to do so at levels of financial investment that would not normally deliver exposure to such high quality properties and tenants.
One clear downside with such investments is liquidity and in the case of Rougemont, other than within its client base, there is no established secondary market for the investment. Accordingly, investors have to be prepared to consider such investments as illiquid and be held as a medium to long term investment. However, it is worth noting that when clients have sought to liquidate their investment Rougemont has, to date, never failed to secure a sale of the holding on a client’s behalf. The process is benchmarked against an annual independent valuation and the transaction typically takes two/three weeks.
An alternative to syndicated commercial property is an investment in an established regulated real estate fund, where there is no direct ownership of the asset and all investment and management decisions are made by the fund managers. These investments are viewed as having a much higher degree of liquidity, with investors normally being able to disinvest at will; however, this is not always proven to be the case. In the early stages of the recession, Aviva prohibited investors from exiting their fund while they battled to meet the scale of investor redemptions and seeking to avoid being faced with having to sell off commercial property below their market value to repay investors.
Co-investors
A further benefit of the UCIS promotion rules is the knowledge that your fellow investors will be like-minded individuals. By only promoting to sophisticated or high-net worth investors, you can be reasonably confident that your co-investors will have the necessary experience to participate in making informed commercial decisions regarding the future management of the asset.
Syndicated commercial property investments, promoted and operated by FCA regulated companies, allow investors the freedom to invest in and own their dedicated percentage of a well tenanted quality commercial property, delivering regular quarterly returns with the potential for capital growth.
The FCA recognises this and by now formally establishing a new regulatory framework, advisors and investors can take comfort in the knowledge that every aspect of the business and its promotions are both transparent and ethical.
Unregulated investments are riskier but the rewards can be greater and, most importantly, investors retain control.
Who invested in syndicated property? How many people are involved in a syndicate? What are the risks of syndicated property investment? How can I sell my syndicated property stake? James Craven, the managing director of syndicated property investment company Rougemont Estates, answers the key questions for people looking to invest in syndicated property.
Who are the typical investors in syndicated property?
A typical investor is 45-years-old and is seeking a secure, long-term income that offers the prospect of medium to long-term capital growth.
Around half of investors acquire through their pension funds, SIPPs or SSAS as any income or capital gain from the property into their pension is tax free, which is a real benefit. Other investors include cash investors, family trusts and farms seeking to diversify.
Rougemont Estates is regulated by the Financial Conduct Authority (FCA) and cannot promote opportunities to retail investors. Our investors have to certify themselves as being either Investment professionals or High Net Worth investors. This provides investors with the security that they are co-investing with similar qualifying individuals.
Has the typical syndicate member changed post recession?
We’ve seen no real change in investor type but we are seeing more traditional equity/share investors who can’t get the long term secure returns they want in the volatile stock market.
Depending on their age and profile, we find most investors who are 45-years-old don’t want the hassle of playing the equity market every day.
How many syndicate members might you have in any one property?
One recent investment we made had a syndicate of 40 members. Where the syndicates are more asset management-based, i.e. multi-let industrial estates, and a more aggressive management role is required, we try to keep the numbers down so that decisions can be made quickly.
Rougemont will co-ordinate decision making within the syndicate including keeping syndicate members informed of matters affecting the property and arranging for specific decisions to be made where necessary.
A separate RICS-regulated property management company will usually handle the day to day management of the property and will account to the syndicate members for all administrative functions; including the collection and subsequent distribution of the principal rent, insurance rent, and VAT.
What investments might these people have been making pre-recession?
Most investors looked to shares and corporate bonds which typically have a shorter period of certainty.
A number of others had built up a portfolio of buy-to-let properties but soon became fed-up with the hassle and have decided to sell up and invest their money in this sort of fund instead.
What is the minimum and maximum investment?
The minimum investment is £25,000 and there is no maximum, but typically, most keep to under £150,000.
How risky is investing in commercial property in comparison to other options?
This market is attractive for investors seeking a long-term income stream and the chance to buy discounted assets reflecting an attractive return.
There is always a risk in tenant default and in the current climate we have to undertake a very rigorous review of any tenants accounts before deciding to acquire. If the building does become vacant there is a risk that the syndicate would have to pay empty business rates and insurance until a new tenant is located.
However, we are seeking to acquire quality assets where the letting prospects are better than most in the current climate.
Can syndicate members sell or transfer their holding whenever they wish?
Rougemont as the syndicate operator can co-ordinate the sale of a holding. An investor can sell at any point and the syndicate as a whole (voting by 75% majority) can decide to sell the property.
Typically, a holding is sold to another syndicate member or another member of Rougemont’s qualifying client base. We don’t see people wanting to sell quickly as most see syndication as a five-year investment as a minimum.
A typical syndicate sale will take just three weeks, depending on price and expectations.
What would happen if Rougemont ceased to exist?
The syndicate would continue to own the property. The legal title to the property is held in the name of an independent Professional Custodian Trustee who must act in accordance with the wishes of the syndicate members.
The syndicate members are the individual legal owners of the title and Rougemont merely acts as managing trustee and regulated operator.
The syndicate Trust Deed includes a provision that allows the syndicate members to change the managing trustee should the members (acting together by a 75% majority of the ownership of the property) wish to do so. This structure safeguards both the legal title to the property and the ability of the syndicate members to appoint new trustees.