Frequently Asked Questions

Commercial Property Investment

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01. Why hasn't commercial property been a viable investment for most investors in the past ?
02. What is the attraction of commercial property?
03. Why invest in commercial property in Liverpool?
04. What is a property investment fund / property investment syndicate?
05. Are there tax incentives with commercial property?
06. Can SIPP / SSAS pension holders invest in this commercial property fund?
07. What are the benefits of investing in this commercial property fund for SIPP / SSAS pension holders?
08. How does the property fund work?
09. Who will provide the mortgages and on what terms?
10. Why not just purchase a building personally?
11. What happens if a tenant goes out of business?
12. What happens if the interest rate increases when the fixed or capped rate period expires?
13. Do all the buildings have a structural survey?
14. What happens when there is a rent review?
15. What happens if a tenant wishes to vacate a building?

 

1 - Why hasn't commercial property been a viable investment for most investors in the past?


A. Historically, investors have been priced out of the commercial property sector, with capital prices around £0.5m to £1.5 Million and required large deposits of around 30% required. With our Shared commercial property investment fund, you can now invest in commercial property.

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2 - What is the attraction of Commercial property?

A. Many property industry commentators and fund managers are backing the small office space sector as the next big growth area. Demand has been such that there is currently very little new Grade A office stock available. Long leases are typically 3-5 years in the small office space sector.  More information for commercial property, specifically in Liverpool - in next section below.

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3. Why invest in commercial property in Liverpool?

A. Liverpool has continued its rapid evolution and the city centre office market in particular has witnessed significant expansion. City centre take-up of circa 498,000 sq ft in 2005 was the highest level in a decade.

Demand has been such that there is currently very little new Grade A office stock available. However, the city has a robust development pipeline with a number of significant new schemes coming on stream and a new prime rent of £20.00 per sq ft is expected to be set this year. See images below.

There has been a substantial level of speculative warehousing development in Merseyside and developers have focused on the region as a prime distribution location. One of the area's attractions is its affordability, with prime land values currently circa £250,000 per net developable acre, and there remains a healthy availability of well located sites.

Investors' perception of Liverpool has also changed significantly. New development and a strengthening corporate occupier market are underpinned by comparatively low rents, indicating a margin for potential rental growth. As a result, prime office yields in Liverpool have recently been subject to greater compression than in any other UK regional city, currently standing at 5.00%.

Strong demand for good quality office accommodation in the city has left little available floor space. City centre take-up in 2005 of circa 498,000 sq ft was the highest level in a decade and continuing demand in 2006 has led to the remaining 42,500 sq ft at City Square being the only new Grade A floor space available, and the majority of this is under offer.

Liverpool has continued its rapid evolution, exceeding both the regional and national GDP growth rates in the early 2000s. Merseyside is also projected to outperform significantly in the future. Having previously experienced long-term average annual GDP growth of 1.3%, Experian Business Strategies forecasts that during the next 15 years this will improve by 100 basis points to 2.3% p.a.

Momentum picked up notably when Liverpool was selected to be the European Capital of Culture in 2008. Acting not only as an impetus for new construction, it also precipitated citywide programmes of refurbishment and civic realm improvement.

Image Below : Prime UK Office Yields.
 
 Prime UK Offcie Space Yields
 
  Image Below : Liverpool Prime Office Rents.
 
 Prime UK Office Trends


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4 - What is a property investment fund / property investment syndicate?


A. Put simply, a property investment fund (or property investment syndicate) is a collection of investors who share the risks and rewards of any financial property venture.

If you have a limited amount of capital then the simplest way to participate is to pool your capital together with like-minded investors. That pool of money is then used to buy land or properties. Each investor then has a share in the property or fund resulting from the sale of any property. You are in effect investing in a company and you own shares in that company in line with the percentage of funds you have placed with the company.

Property syndicates and funds have been used in the last few years to make money from the rapid pace of property investment in general and the sharp rise in capital values in particular. It has also filled a gap in the investment market.
Interest rates are on the floor, so there is no incentive to leave one's cash on deposit. Because interest rates are low the return on either company or government bonds is also negligible. This leaves either property, or a few unusual vehicles for investment. It has in fact meant that over the past two years the whole investment industry has moved seriously into property.

This move alone has had a great effect on the underlying value of property, and values have surged. this effect is driving the market for funds / syndicates.

Please also note that from 2006 in the UK you will be able to put private investment property into your SIPP / SSAS pension scheme.

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5 - Are there tax incentives with commercial property?


A. Please see our page on current property fund tax guidelines.

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6 - Can SIPP / SSAS pension holders invest in this commercial property fund?

A. Yes - The growing popularity of the SIPP (Self-Invested Personal Pension) and SSAS (Small Self Administered Scheme), over the last few years has been largely down to the ability to invest this into Commercial Property.

After 'A' Day, back in April 2006, when the new pension regulations were published, direct investment in commercial property and commercial property funds were permitted.

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7 - What are the benefits of investing in this commercial property fund for SIPP / SSAS pension holders?

A. Some of the key attractions of putting property into your SIPP / SSAS are:

  • Currently up to a 50% mortgage permitted when purchasing a property within a SIPP.
  • All legal costs and expenses are payable from the SIPP.
  • No Capital Gains tax is payable on gains on the disposal of a property held in a SIPP.   
  • No limit on the number of properties which can be purchased within a SIPP (providing contribution and mortgage limits are not exceeded).
  • VAT on improvements to a property are reclaimable by the SIPP.
  • Pensions payable from any rental income.


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8 - How does the property fund work?


A. Investors will subscribe for Partnership interests or units in the Trust. The principal assets of the Partnership will be the specific properties or other assets it purchases together with any cash held.

The Trust will invest in the Partnership and consequently will have an indirect interest in the underlying properties. Subscriptions will fund part of the purchase price of the properties.

Loans will be taken out to fund the balance (typically between 65% to 75% of the purchase price of each building / development). The aim is that the rental income will meet the interest and capital payments.

Property Fund Structure - SIPP - SSAS - Private Investors - Unit Trust - Limited Partnership - Properties

 

The diagram above, depicts the intended structure of the way that the Properties are to be held for Investors.
SIPPs and SSASs will acquire units in the Trust, the Trustee of which (via its nominee facility) will become a Limited Partner in the Partnership. All other Investors will become Limited Partners directly.

The General Partner will acquire and hold the Property (possibly in conjunction with a nominee company.) The Partnership will enter into the loan agreement with the Bank and grant security over the Properties.

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9 - Who will provide the mortgages and on what terms?


A. Property First Asset Management Limited will advise Consortium on the most appropriate borrowing terms.

Typically, the Bank will be entitled to require the loan to be repaid in certain circumstances that are defined as a default. These include without limitation, breaches of certain covenants, a significant fall in the value of the property, misrepresentations and the winding-up of the Fund.

The recourse of the Bank upon enforcement of the security is limited to the assets of the Partnership and the Bank will not have recourse to assets of Investors personally or their pension funds.

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10 - Why not just purchase a building personally?

A. This may be the most suitable option for some investors. However, by pooling investors' equity, it is likely that better quality properties can be obtained than they would have been able to purchase individually.

The Fund also relieves investors of the burden of liasing with valuers, lenders, agents, solicitors etc inherent in any property transaction.

Consortium does not give investment advice to prospective investors in the Fund. All prospective investors must satisfy themselves, by taking the appropriate advice, as to the suitability of the Fund for their personal circumstances.

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11 - What happens if a tenant goes out of business?

A. The fortunes of all companies can change. If something does happen to a tenant and it can no longer pay the rent then two options are available - find another tenant or sell the property.

Unlike residential property, the value of commercial property is not principally based upon its location and bricks and mortar, but to a great extent on to whom it is let, for how much and for how long.

Therefore, if a lease on a building only has a few years to run or if the property becomes vacant (assuming that there are no redevelopment opportunities) then the value of the property can be significantly affected unless and until it is re-let.
Trying to find a tenant can also be time consuming and costly and during this time the owner - the Partnership - will need to pay the empty business rates on the building (usually after three months, at half the normal rate) and in the case of a multi-tenanted building any service charge shortfall. Also, if there is an outstanding mortgage, and the lack of rental income means that the mortgage cannot be paid, the Bank could and probably would force the sale of the property.

Each mortgage is restricted to the assets and any rental income of the Partnership - if a shortfall exists upon sale any deficit will be met by the Bank.

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12 - What happens if the interest rate increases when the fixed or capped rate period expires?

A. The interest rates on the mortgage are likely to be fixed or capped for the initial 5 years of the loan term. However, if the Fund retains the Properties for longer than the initial period and the fixed or capped rate subsequently comes to an end, either a new fixed/capped rate needs to be agreed, or the loan can be left on a floating rate.

The Property Adviser will advise the Fund regarding all aspects of the Fund's borrowing requirements.

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13 - Do all the buildings have a structural survey?

A. When a property is independently valued, the valuers when inspecting the property will make a recommendation as to whether the property should be subjected to structural investigations and a full building survey.

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14 - What happens when there is a rent review?

A. This will be undertaken by managing agents, or if more appropriate, delegated to a specialist firm. The costs involved, including any third party submissions, will be charged to the Property Fund separately and will be met out of the rental income.

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15 - What happens if a tenant wishes to vacate a building?

A. During the term of the lease, the tenant is usually responsible for paying the rent, business rates and other outgoings and will have various other property related obligations. If the tenant applies to assign the lease to another tenant, this may have a knock on effect on the value of the building depending on whether the financial strength of the proposed tenant is stronger or weaker than the current tenant.

Leases usually provide for certain tests to be applied to the proposed tenant which must be satisfied before any assignment can progress, although it should be noted that the manager may not be legally able to refuse an assignment and must respond to any such request promptly.

In all cases Consortium, with the assistance of solicitors, will respond to any request for an assignment.

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