Against a backdrop of rising inflation, political uncertainty and widespread industrial action, the pandemic’s lingering effect upon commercial property values has been striking.
Rising interest rates, meanwhile, will continue to exert downward pressure across the industry. It is here that increasingly advantageous investment opportunities will continue to present themselves to company directors, who could be able to jettison existing rental overheads by acquiring commercial premises, thereby strengthening their business’s balance sheets.
This can be facilitated through a small self administered pension scheme – or SSAS. Originally introduced in 1973, the SSAS has tended to operate in the shadow of the better-known self-invested personal pension (SIPP) platform, although the range of investments available in an SSAS is broader than any comparable pension scheme. They include tax relief on contributions and income, while inheritance tax and capital gains exemptions also apply.
One area of possible investment is shops and shopping centres, which have suffered significant fallout from the pandemic. While online retail sales have soared, muchreduced footfall in every town and city in the country has further depressed the value of bricks-and-mortar retail outlets.
Broader evidence of the real estate downturn that is creating opportunities for investment via SSAS vehicles can be seen in the underwhelming share price performance of the publicly quoted property sector. Meanwhile, many firms have called a halt to expansion plans, further depressing demand for commercial space, of which there is a colossal oversupply.
Investment opportunities will continue to present themselves to company directors.
The exodus from the workplace as employees work from home has added to commercial property owners’ difficulties. To attract new occupiers or retain existing ones, owners must offer incentives such as longer rent-free periods, full fit-outs of premises or shorter lease lengths. If the situation was not gloomy enough for commercial property landlords, from this April, all commercial properties will be reassessed for business rates based on rental values as of 1 April 2021.
While for many properties rents were likely to have been lower in 2021 than they were in 2019-20, that 2021 rent level is almost certain to be higher than in 2015, [the previous base year for rental valuation], meaning there will be a rise in rateable values that will do little to boost commercial property values. This combination of extraordinary economic factors, possibly including a global recession, are likely to exert significant downward pressure on real estate values, effectively creating opportunities for company directors to profit via investment in a SSAS funds.
The SSAS is intended to fund company directors’ retirement, with directors given control over how the fund is invested. Most business owners have used an SSAS to invest in commercial property, particularly their existing premises, but such has been the shift in the commercial property sector that other equally attractive real estate opportunities may exist for SSAS members.
Moreover, an SSAS can borrow money, usually by raising a mortgage to assist with the purchase of existing or new company premises. Mortgage repayments are covered by the rent paid by the company to the SSAS, so reducing its taxable profits. Furthermore, the SSAS is not ordinarily liable for tax on income generated by the investment; nor is it liable for capital gains tax. Further leverage can be achieved because an SSAS pension may comprise up to 12 directors, each of whom can either transfer in funds from an existing pension or contribute to what becomes a single pooled pension, subject to only one set of fees, which is one huge benefit of the SSAS.
While buying residential property through an SSAS is effectively prohibited, it is possible to make a business loan from the pension to the limited company, an arrangement known as a SSAS loanback. The loan can be used for a variety of legitimate business purposes to acquire additional assets, thus further strengthening the company’s balance sheet.
Christine Hallett is managing director of Options UK