Jessica List, Pension Technical Manager, Curtis Banks
Recently at Curtis Banks we’ve noticed an increase in the development activity taking place in our book of commercial properties. Development has always been a popular part of many property investment journeys, offering a range of potential benefits to investors.
Whether you’re new to the idea of developing property within a pension, or have clients who are considering it but aren’t sure where to start, here we’ll cover some of the key points to consider.
Developing property could involve anything from fairly minor improvements through to complete refurbishments to change a property’s use. It could even involve building a property from scratch on a piece of land that’s owned by the pension.
Making improvements to a property may increase its value and allow it to command higher rents. Additionally, we believe there are a few other factors that could particularly be contributing to the higher levels of activity we’re currently seeing.
The first is the upcoming change in the minimum energy efficiency standards (MEES) regulations. The MEES regulations have been around for a few years already – their purpose is to help increase the energy efficiency of buildings across the UK. The next big milestone for MEES in relation to commercial properties is coming up in April 2023.
By then, a commercial property must have a minimum energy efficiency rating of ‘E’ in order to continue to be let to a tenant, unless it meets certain exemptions. The owners of properties with lower ratings have just under a year left to make any required changes to increase their energy efficiency, or they won’t be able to let their properties.
Even aside from the MEES requirements, the increase in energy costs might be driving some property investors and tenants to consider how to minimise bills by making their properties as energy efficient as possible – or perhaps even exploring options for the property to generate its own energy.
Over the last couple of years, there has also been speculation about how the pandemic may change the way commercial properties are used – for example, whether retail or office spaces will be used more innovatively, or whether the increase in online shopping will increase demand for warehouses and storage spaces. Some investors may see opportunities to increase the value or profitability of their properties by adapting them to suit new purposes, or perhaps converting them for a different use altogether.
Perhaps the most important consideration is how to set about undertaking development works to a property held in a pension. Clients may not realise the importance of speaking to their provider before beginning any work, but it can be crucial to the success of a project. There are certain requirements and regulations that need to be met with any development works, so it’s important to work with the provider and go through the right steps to help ensure there’s no risk to the pension.
While we can’t confirm all the steps that may be required for a project and can’t speak for all providers and their processes, here are a few key areas that are likely to need consideration:
– Multiple quotes: it may be necessary to obtain more than one quote for the proposed development to help ensure the pension pays a fair price for the work.
– Nature of development: it will be important for the provider to check that the proposal is actually a development to the property itself, rather than adding a fixture or fitting for the tenant’s use. Pensions can’t invest in what are known as tangible moveable assets (TMAs) without incurring significant tax charges. This isn’t to say that tenants can’t make changes or add fixtures to a property: however, it’s likely that they will need to pay for the development themselves. There may also need to be a written agreement that the tenant would put the property back to its original state when they vacated.
– Changing use: the provider may have specific processes or requirements if the development will change how the property is used. For example, if a property is being converted to residential use, residential properties can’t be held in a pension without incurring tax charges. Providers will have their own rules about how far the process can go before they require the property to be sold from the pension. For example, they may allow the residential planning permission to be obtained but need the property to be sold before any development begins.
– Related processes: there may be additional processes to complete once the development has finished, such as reviewing the terms of the lease or the amount of rent due.
Developing a property can be a great way to help make the most out of the investment, particularly over the longer term. Working with a SIPP or SSAS provider that is familiar with development projects and understands the requirements from a pension perspective can help make sure that everything goes to plan as smoothly as possible for the client and their tenants.