Should residential property be allowed in pension schemes?
There is one anomaly which has been ongoing for many years now and that is rules in the UK which ban residential property from pension schemes. The UK government has recently introduced an array of new pension regulations which allow greater access to personal pension assets but so far there has been no indication of a change in the residential property rules. So, why is residential property banned from pension schemes and should the authorities look at changing this in the short to medium term?
Long-term rental income
When you look at the worldwide real estate market (both residential and commercial), businesses come and go with the steadier area of real estate most definitely residential. Many of us have experienced or seen the monumental impact that an economic downturn can have on all areas of real estate although the residential sector seems to bounce back quicker than the commercial arena. Indeed, over the last few years we have seen high streets across the UK decimated as e-commerce continues to grow at the expense of traditional shopping outlets.
Residential property rental yields across the UK vary enormously with London dipping under 3% during 2014 yet some areas of the UK offer yields in excess of 10%. This variation in rental income offers access to a broad range of asset types, some of which are focused on long-term capital growth while others look for steadier long-term rental income. These are the perfect assets for any pension fund, gradual long-term capital appreciation supported by long-term rental income.
Funds available today
When you bear in mind that pension funds in the UK hold billions of pounds in cash in light of recent economic challenges, would these funds be suitable for long-term residential property assets? As we touched on above, the long-term nature of real estate, and especially residential property, would be a perfect fit for many pension fund managers. It is known that many would jump at the chance to include direct investment in residential property within their portfolios – but will they get the chance?
What is the problem?
The simple fact is that the billions of pounds of pension fund money that would inevitably pour into the residential property market would create greater demand for individual assets and push prices even higher. We are already in a situation where first-time buyers are priced out of the market across many areas of the UK and the injection of pension fund assets would only make this situation worse.
It is also worth noting that even during the difficult times for UK real estate there has been constant growth in interest from international investors. The likes of London have become something of a safe haven during these challenging economic times so in theory there is little in the way of “slack” for the pension fund industry to pick up.
Conclusion
Therefore, on reflection, it is highly unlikely that any government in the short to medium term would allow direct investment in residential property within UK pension funds. Pushing prices higher and higher, due to be injection of billions of pounds of pension fund money, would force many people to rent creating something of a vicious circle. This would reverse the long term trend of property ownership in the UK – a trend which is already under pressure.