BP : Volatile Markets - is property the way forward?
16/06/2010
With Tony Hayward, BP’s Chief Executive already warning their biggest shareholders that the forthcoming dividend payment of $10 billion (£6.86 billion) was ‘likely’ to be suspended, North East Property guru, Amy Fettis gives her view on BP and the implications for UK pension funds and investment. Fettis is the Property Expert for The Professional’s Partnership in Newcastle (set up by Roy Perkins of St James’ Place) as well as being the Managing Director of thriving property group Principle PG, now in it's third year.
Amy Fettis quotes “with BP vulnerable to takeover, and their shares already 40% down and falling in just two months, the only sure way to guarantee long term investment is through property. The property market is renowned to be extremely stable in comparison to that of stocks and shares, with excellent rates on capital invested. Property gives you the ability to purchase something with other people’s money (Bank) and pay back with other people’s money (income from tenants). Furthermore it has been seen that construction of new properties has increased for the 3rd consecutive month – thus showing the population that the property market is gaining strength since the recession. In addition mortgage lending has jumped 16% - therefore giving buyers greater opportunity of purchasing properties”
This trend is further compounded by pension funds purchasing commercial property with investors increasingly buying commercial property with their pension funds, both in the UK and overseas, to take advantage of the tax breaks on offer.
Amy Fettis continues “Interest in commercial property investment has picked up in recent months following a bottoming out of prices at bargain levels. Investors have flooded back into retail funds, while institutions have also been snapping up prime properties. Some investors are now opting to gain direct access to commercial property by putting it into their pension plans. Individuals can invest in commercial property – such as retail shops, business premises or industrial units – through a self-invested personal pension (or Sipp) – although residential property, including holiday homes, is not allowed. Investing in property through a pension offers a number of benefits. Tax relief on pension contributions can help subsidise the purchase of a property in place of a mortgage or other lending arrangement. Sipp rules also allow people to borrow up to 50 per cent of the value of the fund to make an investment. Once a property is held within a pension fund, there is full tax relief on gains within the fund, while rent is paid to the pension free of tax. If the property is sold within the pension scheme, it is not liable to capital gains tax. Buying commercial property in a pension is also becoming a popular move among high earners, who now face restrictions on their pension contributions”.
BP's own research says it accounts for 8% of UK pension fund income. The National Association of Pension Funds (NAPF) estimates that UK pension funds' exposure to BP was only about 1.5% of their total assets, which are worth more than £800bn.
BP directors will discuss later whether to suspend dividends to shareholders, following the Gulf of Mexico oil spill.