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By Kevin Brass
International Herald Tribune
FRIDAY, OCTOBER 7,
2005
In the small ski resort town of Bansko - billed as "the
best-kept secret in Bulgaria" - real estate experts are closely
following coming changes in Britain's pension rules.
"Potentially it could explode the market," said Clive
Ireland, corporate director of MacAnthony Realty International,
which opened an office in Bansko last month.
Under the
pending rules, British pensioners will, for the first time, be
allowed to use money in a self-invested personal pension fund (SIPP)
to buy residential property, including second homes and investment
property in other countries.
While there are many
ramifications, the most striking feature of the changes is a tax
break that could amount to 40 percent of the purchase price of a
home, depending on the buyer's tax bracket.
In effect, a
buyer using money in a SIPP fund could buy a 200,000, or $145,000,
property with only 120,000. Also, properties generating revenue will
be exempt from most U.K. taxes.
By making the changes, the
Treasury Department hoped to encourage pension investments and to
bring SIPPs in line with other pension funds, which allow real
estate investments, according to a Treasury spokesman.
The
new rules are set to go into effect April 6, commonly referred to as
"A-day" in the pension industry.
"As soon as people begin to
realize, it will be like pouring fuel on a fire," said Jeremy
Rollason, a director at Savills International, the U.K.-based real
estate firm. "People will be rushing to purchase residential
property through these schemes.”
While popular markets like
the Costa del Sol and Côte d'Azur are most likely to see an
immediate impact, analysts believe the ripple effects will be felt
in places like Cyprus and Dubai, where home sellers already are
trying to attract more British buyers. "Potentially the impact could
be quite large," said Ireland.
Bulgaria has a favorable
exchange rate, which already is helping to attract more British
visitors. According to Bulgarian government statistics, the number
of U.K. tourists jumped to 259,000 in 2004, a 63 percent increase
over the previous year.
In Bansko, tucked in the mountains
in southwest Bulgaria, a furnished, 107-square-meter, or
1,200-square-foot, three-bedroom apartment with a mountain view in a
new development is sold for around 127,000; a small studio for as
little as 46,000.
Ninety-five percent of MacAnthony's
English clients in Bulgaria are investors, Ireland said, enticed, in
some cases, by guaranteed rental returns of 6.5 percent per year for
three years.
With the help of the new pension rules, a
British buyer in Bansko could reap the U.K. tax benefits at the
purchase and then sell the property without paying tax on the
profit, thanks to Bulgaria's lenient tax laws. "Effectively, it's a
double whammy," Ireland said.
The British continue to be
voracious buyers of overseas real estate, encouraged in recent years
by inexpensive air fares. More than 250,000 British citizens now own
property overseas, up 50 percent in the last decade, according to
the government's Office of National Statistics.
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While estimates vary wildly,
analysts believe the changes in the SIPP rules will shift anywhere
from £5 billion, or $9 billion, to £11 billion of pension funds into
real estate in the next few years. And the number of SIPPs is
expected to grow tenfold by the end of 2006.
However, the
restrictions placed on the new rules were designed purposely to
prevent any mass rush to buy, the Treasury spokesman said.
The rules dictate that the SIPP will own the property and
any rental income would go into the SIPP, so an investor could not
expect a flow of ready cash from a property, he said. In some
scenarios, an individual might even be forced to pay rent to the
SIPP for the use of his or her own vacation home. In addition, there
is a cap on the amount that can be invested in real estate,
currently set at £215,000.
Many financial consultants in
Britain are advising caution. "It presents tremendous opportunity,
but there are potential downsides," said Allan Young, an independent
financial adviser and partner in Tag Wealth Management, based in
Sheffield, England.
Many pensioners might focus their
retirement accounts too heavily on real estate rather than a more
diverse mix of investments, Young said. And they may find it
difficult to liquidate their assets. "Ultimately the money in a
pension fund has to be converted to income," Young said. "Real
estate is notoriously more difficult to get rid of than, say, stocks
or equities."
While SIPP purchases will be exempt from most
U.K. taxes, overseas buyers will be subject to the tax laws of the
local country, adding a level of complexity to any transaction.
Spain, for example, does not recognize trusts.
"Buying a
second home abroad using a SIPP won't be as straightforward as
buying a second home here," said Jennet Siebrits, head of
residential research for CBRE Hamptons International, a U.K.-based
real estate company. Siebrits believes the new SIPP rules are
unlikely to spark a flurry of activity. "I do think some of the
estimates have been grossly exaggerated," Siebert said.
But
around Europe, property agents are preparing for a potential wave of
new buyers. "We've already had a tremendous amount of inquiries,"
said Tony Sparkes, managing director of AGS Properties, based in
Alicante, Spain. "We're all trying to gear up and jockey for this
enormous rush come April."
The new SIPP rules are welcome
news in Spain, where some analysts believe sales of vacation homes
are starting to slow after a decade of almost annual double digit
growth. Of the overseas homes owned by British citizens, 27 percent
are in Spain, according to government figures, making it the largest
market for British buyers. "I think the market will now open up to
smaller investors," said Tony Morris, managing director of Dragonfly
Spain, a property firm based in Valencia. Dragonfly is organizing
investment funds designed to attract SIPP money. But, at this stage,
Morris said, there is "a lot of confusion" about the SIPP rules. "I
think it will take awhile to see a
huge impact," Morris said. "But I'm prepared to be wrong."
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