54 | SIPP SALES
Don’t slip up on SIPPs
Pension packages may have helped developers and agents to sell overseas homes last year, but can you tell the difference between safe and potential risky SIPP models? OPP offers some insights and guidelines.
Self Invested Personal Pensions (SIPPs) helped some developers make vital sales in
2009, but there are a growing number of professionals in the industry concerned that sellers, particularly IFAs, are not asking enough of the right questions. “Financial services professionals
have a general knowledge about what is SIPPable but they require reassurance,” says Vas Agridhiotis, managing director of A World Overseas, which launched a new SIPP product in Crete last year. “Is it legal? Is it safe? Are the returns attractive for their clients? And prove it!” Long regarded as the ‘holy grail’ of
introducers, independent financial advisers are a key part of the SIPP sales model because, unlike developers or agents, they are regulated to offer financial advice. However, some believe that SIPP sales could become a pension mis-selling time-bomb for the overseas homes sector – and this could backfire on the financial services industry.
Selling responsibly
“How can you advise on an investment product, which a SIPP is, without knowing the answers to quite fundamental questions,” asks Pam Prince, a director of Pure Cyprus Invest, which is working exclusively with a Cypriot developer on the first SIPP compliant product in the country. “Once the IFA writes a risk it is with him for life, not just a few years. If a client is given bad advice, it’s not the developer that will be responsible, but the IFA.” In contrast to IFAs not asking
enough questions, agents specialising in property investment are already expressing concern over developments that can be bought through a SIPP saying that some schemes are ‘too risky’. “The appetite for SIPPs is quite high, but too much of the property on offer is either in an emerging market or is off-plan without a mortgage deal in place,“ says Richard Sheret, managing director of Global Property Select. Michael Smith, head of technical
at SIPP provider Pointon York, agrees that mortgages are one area where investors and introducers need to be very careful. “If you’re going to rely on borrowing you have to be sure you’ll get it because if it falls through you’ve lost your whole investment,” he says. “If they’re buying overseas there is a chance they will not get a UK lender to agree to lend in the current economic climate.” However, this doesn’t mean SIPP sales that require a mortgage should be avoided altogether, he adds, and the fact that investors can only borrow half of the value of the SIPP funds could work in their favour. “Banks may be more likely to lend to pension buyers because they must own two-thirds of the equity in the property outright. A lot of developers offering stage payments also have finance built in to the deal – it’s in their interests because they want people to be able to buy their product.” While most SIPP providers would
unlikely want to put their name to a product they had misgivings about, Price points out that a SIPP provider’s main concern is a product’s tax compliance, and capital adequacy
www.opp.org.uk | APRIL 2010
rules are not part of their criteria. “Is the client going to have to speculate on end value to ensure that they will not need to put any more funds into the deal to complete? If so, then how realistic are the end valuations, given the current world economic climate and also most people’s attitude to risk? “We as a developer have an end
valuation in place now to ensure that our deal fits within SIPP lending criteria. We have taken a reduction in
Guy Tolhurst, managing director of
consultancy Intelligent Partnership says agents and introducers should look at what is supporting rental income. “People should be asking who is the hotel operator and who’s going to be paying the yield,” he said. “The operator of Caracola Beach Resort in the Caribbean has taken out an insurance policy to the tune of $10 million to underwrite the rental yield.” Overseas property lawyer John
A lot of people are promising growth but a project should stand up on its rental yield. If investors rely on growth and have financing they’re exposing themselves to critical risk.
Charlie King, Resort Group
profits and have not had to speculate on growth by even 1% to make sure the model works.”
Are promises realistic?
Even developers admit there are risks to consider with some SIPP models. “A lot of people are promising growth but a project should stand up on its rental yield. If investors rely on growth they could expose themselves to risk,” says Charlie King, managing director of The Resort Group, which claims that 73% of the 375 units it sold at its Cape Verde resort in 2009 were to SIPP investors.
Howell says agents can often make an initial judgement on whether or not it stacks up based on yield promises. “Yields depend entirely upon product and market, and risk is mainly from projections of excessive yields,” he says. “In mainstream areas, 5% net rental yield and 5% projected capital growth is good at the moment. In emerging markets with greater risk you need more. Is it really available? Also look carefully at the impact of SIPP operating costs on yields. Some are far too high.”
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