100k personal pension (SIPP Commercial Property Vs Stock Mkt PP)?

Pythagorous

So I have 100k in a personal pension, which i currently leave well alone to the fund manager gods (although I do take some involvement in choosing the stock market asset spread etc).

I've been thinking of maybe taking the money out to invest in commercial property via a SIPP instead. I've ran some very approx figures on the projected returns from both. I'd be interested in some feedback to improve the figures and also general thoughts - would you favour SIPP commercial property over a fund manager run personal pension pot?

Assumptions
Long Term Inflation 3.00%
Gross Yield (infl +3%) 6.00%
Financing Cost (infl +1.5%) 4.50%
Pension Pot 100,000
Borrowing @ 50% 50,000
Purchase Price 150,000
Ignore rental increase
Ignore purchase costs (assume negligible in the long term & offset by rental increases)
Assume property is held for 17 years

MY ROUGH FIGURES
ASSUMPTIONS
Long Term Inflation 3.00%
Gross Yield (infl +3%) 6.00%
Financing Cost (infl +1.5%) 4.50%
Pension Pot 100,000
Borrowing @ 50% 50,000
Purchase Price 150,000
Ignore rental increase
Ignore purchase costs (assume negligible in the long term & offset by rental increases)
Assume property is held for 17 years

INCOME (purchase price* gross yield) 9,000

COSTS
Finance 2,250
Void (assume 1/2 month pa) 375
Misc upkeep etc 1,000
Total: 3,625

NET REVENUE 5,375
% return (income) 5.38%

Capital Growth (infl + 1%) 4.00%

Overall Return (~income + capital growth) 9.38%
Stock Market Expected return (infl + 3%) 6.00%

Notes
V difficult to compare these two investments as they are different animals!
Commercial Property is geared at 50% hence greater risk

Malthusian

An individual commercial property is much much higher risk than diversified funds. How will it affect your retirement if the area where the commercial property is becomes a ghost town, and the worst-case scenario arrives where you have to fire-sale the property to pay the mortgage?

What happens when you retire? Are you happy to live on just the rental income, given you won't be able to sell down part of the portfolio as you could with stocks and shares? And what happens to your retirement if the tenant stops paying? Are you willing to continue working as a commercial property landlord in your retirement? If not, are you happy with the risk that comes with being a forced seller when your retirement date arrives?

We know nothing about whether your assumptions are reasonable but 1/2th a month void period sounds potentially optimistic. Does the property already have a long-term tenant in place?

Do your figures include the additional charges you will need to pay to a specialist SIPP provider?

If you want a return higher than 3% above inflation and are happy to acccept a higher risk of loss - even permanent loss - then have you considered a more aggressive portfolio with higher-than-normal allocations to smaller companies and emerging markets? If not, why the leapfrog up the risk scale?

Personally I would not go down this route unless my business was the tenant and I therefore had some insight and active involvement.

Pythagorous

Malthusian wrote: »

An individual commercial property is much much higher risk than diversified funds. How will it affect your retirement if the area where the commercial property is becomes a ghost town, and the worst-case scenario arrives where you have to fire-sale the property to pay the mortgage?

What happens when you retire? Are you happy to live on just the rental income, given you won't be able to sell down part of the portfolio as you could with stocks and shares? And what happens to your retirement if the tenant stops paying? Are you willing to continue working as a commercial property landlord in your retirement? If not, are you happy with the risk that comes with being a forced seller when your retirement date arrives?

We know nothing about whether your assumptions are reasonable but 1/2th a month void period sounds potentially optimistic. Does the property already have a long-term tenant in place?

Do your figures include the additional charges you will need to pay to a specialist SIPP provider?

If you want a return higher than 3% above inflation and are happy to acccept a higher risk of loss - even permanent loss - then have you considered a more aggressive portfolio with higher-than-normal allocations to smaller companies and emerging markets? If not, why the leapfrog up the risk scale?

Personally I would not go down this route unless my business was the tenant and I therefore had some insight and active involvement.

Thank you. A very valuable perspective and reminder of the various risks.

dunstonh

An individual commercial property is much much higher risk than diversified funds. How will it affect your retirement if the area where the commercial property is becomes a ghost town, and the worst-case scenario arrives where you have to fire-sale the property to pay the mortgage?

Funny you say that as I know someone the bought a commercial property purely for financial gain. He did fairly well for a number of years (no better than conventional investing). However, the local authority opened up some more land for commercial use next door and a lot of shiny new units were built. The oversupply of new units killed the value on the old units and because so many were empty, the rents took a hit too. He ended up getting out with a loss and a long dead period on rent.

AnotherJoe

Void (assume 1/2 month pa) 375

Seriously? I see commercial units up for rent, vacant for months on end around here and I'm in a prosperous area.

If you want to invest in commercial property there are many funds you can use, which are lot less risky and a lot more liquid than one property.

bostonerimus

Don't put all your eggs in one basket and don't borrow to invest. If you want to get into commercial property look at the various specialized funds first.

Pythagorous

AnotherJoe wrote: »

Seriously? I see commercial units up for rent, vacant for months on end around here and I'm in a prosperous area.

If you want to invest in commercial property there are many funds you can use, which are lot less risky and a lot more liquid than one property.

Hence my reason for posting!

My residential units average about this and I thought commercial was similar if not better.

Pythagorous

bostonerimus wrote: »

Don't put all your eggs in one basket and don't borrow to invest. If you want to get into commercial property look at the various specialized funds first.

I agree with the diversification aspect. However this is only part of my retirement portfolio, so I am actually diversified.

Wouldn't necessarily agree with your "don't borrow to invest". It raises the risk for sure but of course also raises the potential return.

Malthusian

Pythagorous wrote: »

I agree with the diversification aspect. However this is only part of my retirement portfolio, so I am actually diversified.

Wouldn't necessarily agree with your "don't borrow to invest". It raises the risk for sure but of course also raises the potential return.

Indeed, but it doesn't just raise the risk, it raises it way above any conventional 1-10 risk scale. For most people "higher risk" means bigger ups and downs, it doesn't mean the down may not only lose all the money you invested but even more than that.