Many have seen their profits squeezed or completely wiped out from the introduction of the recent tax relief.
Mortgage brokers are increasingly referring clients to commercial buy to let options as a viable alternative to traditional residential lettings.
This is due simply to the fact that rents on commercial spaces tend to be higher giving landlords a better yield on their investment.
It’s a different game all together though, with risks a plenty. With many exploring commercial property mortgage options and running a commercial property portfolio, it’s good to know what to consider before making the leap.
What is the difference between buy to let and commercial mortgages
When you think of buy to let you probably think of the traditional private landlord renting their property to private tenants. This can be just someone who needs somewhere to live.
The mortgage finance will calculate the value of the property and its potential rental income. This will decide your mortgage payments.
You may have heard of ‘complex buy to let’. This covers anything form large apartment complexes to several housing units that could be rented out to multiple families. This also encompasses HMO’s, Houses in multiple occupation. This would typically be student accommodation where they have lockable rooms within the same property.
The mortgage finance structure here is usually more complicated and will most of the time be arranged through a limited company.
Semi Commercial Property is another variation. Usually this refers to a building with a shop or restaurant in another part of the building, then residential accommodation in another part.
Private landlords will usually rent this out a business that conducts commercial activity on the premises.
The value of the property and the rental incomes from it calculate how much a commercial property mortgage will cost. Also what business is in the property.
These requirements decide how likely it is that a landlord will be able to secure the mortgage finance.
They are just subject to a different type of scrutiny than traditional mortgages.
The UK commercial property market in a nutshell!
If you go off the latest figures from the Royal Institution of Chartered Surveyors, the suggestion is that the UK commercial property mortgage market is in reasonable good shape. Industrial space is beating both office and retail in terms of growth.
For Q1 of 2017 the RICS Market Survey shows that investor interest is also up across all the sectors. This translates to a 18% increase in those receiving enquiries for investment.
This includes demand from overseas. Again, during Q1 the main emphasis was on industrial space.
Industry as a sector of the economy also did well in terms of capital value. Over 44% of respondents here predict price rises over the next several months. The highest confidence level since the end of 2015.
How will Brexit effect commercial property
It’s thought that the growing dis-ease around the UK decision to exit Europe may have caused some investors to rethink the value of acquisitions being targeted in the UK.
This slowdown however has resulted in some assets being priced on the market with Brexit factored in.
This played an important role in the strong results that were seen during the last quarter of 2016. This was the fastest quarter on quarter growth for investment in three years. Most of it from overseas, a total of £24 billion for the year 2016. This was just under half of all investment.
In addition, the relatively weak pound against the dollar and euro has also made the UK property market look very attractive heading into 2017. It mainly consisted of large office and retail sites in the major UK cities. Demand for these assets has remained high into 2017.
Overall we see positive signals when looking at how these investments performed. The only caveat was that in June when Britain voted for Brexit retail investors scaled back these property funds to the tune of £1.4 billion. About 6% of the sectors total £23.3 billion in assets.
Most commercial property mortgages are accounted for by the smaller market of shop sites, takeaways and independent eateries. The most recent figures suggest that £5.2 billion was underwritten for the end of year June 2016.
Demand has been growing though for these kind of property investments. An increase of 55% said the NACFB. This was the strongest growth area second only to short term bridging finance and bridging loans.
Should I invest in Commercial Buy-to-let
Before you decide, it would be good judgement to speak to a professional who can help you understand the risks and commitments involved.
It’s not a guaranteed way to make money and is by no means straightforward.
However, there are many opportunities at the moment and for many experienced buy-to-let landlord’s commercial property mortgage options are becoming a popular choice.
Nigel Whitfield says “Since the government has introduced the wave of fiscal and regulatory changes to buy-to-let we have witnessed a noticeable increase in the number of landlords who see commercial property investment as a viable option.”
He adds “Those looking for higher yields and better return on investment are often drawn towards semi-commercial properties. There’s no stamp duty surcharge and often not the additional affordability scrutiny that comes with a personal buy-to-let mortgage.”
What is a semi-commercial property
These are sometimes called mixed properties and consist of both commercial and residential components. One of the most common examples is a shop that has offices or apartments above it.
Research suggest that over the past six years’ semi-commercial properties produced a gross yield of 7.6% per annum. This is compared to 6% for a traditional buy to let investment.
The key thing to remember is that buy to let mortgages do not apply to semi-commercial real estate. Investors need to look at commercial finance to fund this.
This can be tricky though as the main banks will offer the most attractive rates here but will often insist the borrower has previous commercial experience and a proven track record.
It’s also worth noting that the tenant plays an important role too in that the lender will often want to see the tenancy duration mirror that of the mortgage term. This can vary considerable.
Getting a commercial property mortgage the right way!
For any investor looking to make the change from residential property to commercial, or a mix of both. Sound guidance and advice is key to get the deal over the line with the correct terms and desired funding.
Short Form Consultants work with brokers and lenders to guide you through the commercial property mortgage process. This is not something the high-street banks have a good reputation for. The trick can often be in knowing which lender you need to approach.
Most alternative lenders can only be approached through a commercial mortgage broker as a sort of quality control measure.
Each lender has its own niche and preferences to who they work with. Some will offer the rates depending on yield. Lower yield means better rates, tenants here are often viewed as being well established businesses on long term lease agreements. Thus, less likely to default.
In addition, many will offer an interest only period as well as considering shorter lease agreements.
All lenders will mostly opt for those with a good track record in business and their trading operations. They tend to be less interested in businesses that rely heavily on the quality of the operator and where failure rates are already high. Like the pub and restaurant trade.