Published Autumn 2011
The value of commercial property reached a peak in late 2007 prior to the run on Northern Rock and the subsequent economic crisis and recession.
Over the past four years the values of many properties have fallen quite significantly with some indexes putting values at up to 40% below peak.
A very significant factor in these reductions has been the reduced availability of credit. Banks are much less willing to lend than in the boom years and lending tends to be at a higher margin and require a lower loan to value ratio. However, for those businesses and individuals that are able to access credit now may just be the time to dip back into the property market.
Recent evidence suggests that the Bank of England is unlikely to increase base rate until at least 2013 and even then increases are likely to be modest by comparison to the long term trend. Accordingly, although Banks may be preserving their margins and lending less as a percentage of the value of properties the real price of credit remains cheap by reference to long term averages.
During the boom years many businesses and individuals were priced out of the property market by speculators and others who were accessing the large amounts of cheap credit which were then available. 100% mortgages and a rapidly rising market encouraged speculation and prudent purchasers and businesses often lost out on opportunities to buy property.
This has now all changed. In most instances property is now a buyers’ market. Compared with a couple of years ago there is a greater supply of property available in the market and we are starting to see a structured programme of forced sales by the banks, particularly the Irish Banks that are now governed by NAMA and Royal Bank of Scotland and Bank of Scotland, all of which lent huge sums in the property sector, many loans of
which are now in default.
In addition, changes to the pension rules in this years’ budget mean that it is now possible to contribute greater sums each year to personal pensions, as well as the prospect of carrying back “lost” contributions from prior years. This means that those with Self Invested Personal Pension Schemes (SIPPS) are able to introduce much more substantial sums of money into their pension and accordingly we may start to see a return of many business owners using their pensions as a means of purchasing the property from which their business operates. This can prove to be an extremely tax advantageous structure for business owners.
SIPPS are limited to borrowing a maximum of 50% of their asset value and so borrowing is unlikely to be at levels which give Bank’s cause for concern. A Bank’s primary focus in such circumstances will often be the ability to service the loan. Assuming that leases are in place to the business owners’ company then rents payable should more than cover servicing of loans and all surplus rent will be accruing in the pension scheme tax free.
Whilst property prices may not appreciate significantly over coming years those businesses and individuals with access to funds might wish to consider investing in property as a long term investment strategy and one which might allow access to property ownership where it has not been possible previously.
Neil Myerson LLP have substantial experience of acting in connection with the purchase of property on behalf of clients, whether through a company, LLP, a hybrid combination of a company/LLP, individually or through a pension scheme. We are also able to deal with the requirements of any Bank that might be assisting with the purchase.