Now is time to use property to help your pension fund
Published 24/01/2013 | 05:00
Recent controversy about the cost to the taxpayer of funding our cabinet ministers' pensions set me thinking about the fundamentals of my own pension planning. It transpires that the value (cost) of our current ministers' pensions if bought today is €36m, which seems like a high price to taxpayers.
Alongside this, Savills sold Sandford Lodge in Ranelagh, Dublin 6, a modern development of 119 apartments plus an office block, fully let and producing just over €2m p.a. in rent. US opportunity fund Kennedy Wilson bought it for €27m. This is above the asking price but still producing a net yield of 6pc a year.
What struck me is the disparity in the return on this investment versus the cost of funding our ministers' pensions.
While they are actually funded out of current Government income, if they were funded like private defined benefit schemes they would be based on prime bond yields e.g. German bonds paying 1-2pc.
Surely taxpayers would be far better off if the State bought property investments like Sandford Lodge to fund public sector pensions. And when the current group of ministers have passed through the pearly gated voting lobby and their pension payments cease, the taxpayer would still own Sandford Lodge – and all its revenue.
All of this has caused me to think harder about buying property for my own pension.
The arguments for buying property this year are becoming compelling as markets are stabilising and yields are attractive. The total value of property investments sold in 2012 was five times that sold in 2011. Overseas bottom feeders and the Irish pension funds are mobilising. Most of the tenants that were going to fail have done so. On top of all that, in an effort to stimulate activity the Government reduced stamp duty to 2pc. Best of all you will pay no capital gains tax on your profit if you buy a property this year and hold it for at least seven years. 2013 is the last year you can avail of that relief and all my instincts are telling me that this is the year to buy.
But what to buy? If you are experienced in property in order to maximise the exemption from capital gains tax, I would be looking for a property with a problem that is reducing the value now but which can be sorted out over time. Perhaps a property with a structural problem. Or a landlord and tenant dispute.
While many investors are feeling too beaten up to consider even the obvious prospects, I'll be learning from the lessons of the past when looking at opportunities in both commercial and residential property. One of the surest bets is how values rise fastest alongside new infrastructure. A new Luas line is to be built along a 6km route from St Stephens Green to Cabra.
I'd take a drive along that route and look for opportunities within 350 metres of that line.
Most Irish investors only believe in a new road or railway after it has opened and delay buying until then. Don't wait until everyone's travelling on the Luas and looking out the window at the opportunities.
Always look for properties close to employment centres.
Watch out for changes in areas. Sherry FitzGerald report that due to employment increases in north Kildare, house prices are rising relatively faster in Maynooth compared to some established areas of Co Dublin.
The Luas extension will connect existing lines, improving accessibility for properties on those lines and reinforcing growth prospects.
Which brings us back to Sandford Lodge, close to the Luas stop in Ranelagh, and isn't it a pity that the State didn't buy it for taxpayers?
Paul McNeive is a chartered surveyor and author of “Small Steps” a bestselling book on business and motivation - paulmcneive.com