Commercial Watch Episode 1
We kick off our series of Commercial Watch | with Commercial Watch Episode 1. In recent months, the buy-to-let market has undergone significant transformations, encompassing alterations in tax relief, stamp duty, rental stress calculations, and PRA rules targeted at portfolio landlords. Unsurprisingly, borrowers seek strategies to navigate these additional costs and regulations effectively.
This trend has given rise to a growing interest in commercial and semi-commercial (mixed-use) properties. Landlords are increasingly exploring these sectors as potential avenues to mitigate the impact of changing market dynamics.
This shift towards diversification not only has the potential to alleviate the burden of regulatory changes but also holds the promise of driving property prices higher in these specific segments. Consequently, the heightened demand for commercial and semi-commercial properties may reduce available stock, creating a noteworthy impact on the overall landscape of the buy-to-let market.
Commercial Watch Episode 1 | Semi-commercial surge
The surge in demand for semi-commercial properties, characterised by the presence of a shop combined with residential space above, is gaining momentum due to its numerous advantages, closely mirroring those of full commercial properties.
An observable trend reveals an increasing number of shop owners seeking planning permission to convert the space above their establishments into flats or even consider completely transforming their shops into residential units. Traditional Buy-to-Let (BTL) landlords are also exploring the semi-commercial option as a strategic move to expand their property portfolios.
The scope of semi-commercial ventures extends beyond shops, encompassing residential flats situated above establishments like pubs, restaurants, hotels, and even garages. Surprisingly, even supermarkets are exploring innovative ways to integrate residential flats into their properties, capitalising on the pressing housing shortage in the UK. Many local councils support such initiatives, readily granting planning permissions, as this approach maximises the use of brownfield sites and aids in meeting housing targets.
For traditional BTL borrowers, semi-commercial properties offer a balanced blend of the familiar residential element and a proportion of commercial space. This trend is gaining traction as lenders increasingly find comfort in borrowers with a proven track record of managing multiple BTL properties effectively. Furthermore, opting for semi-commercial properties represents a more gradual transition for borrowers, making it a viable and appealing alternative to diving directly into the complexities of pure commercial ventures.
“Even supermarkets are looking at how to create residential flats above their properties”
Commercial Watch Episode 1 | Tax advantages & reduced costs for commercial & semi-commercial properties
The alterations to mortgage interest relief do not apply to commercial properties, allowing for fully offsetting commercial loan payments against income before tax calculation. This exemption extends to semi-commercial properties on a proportional basis, providing a favourable financial scenario for property owners. Furthermore, both commercial and semi-commercial property owners enjoy reduced stamp duty costs, exemplified by a mere 2 per cent stamp duty on a £250,000 property, as opposed to the 5 per cent accompanied by the additional 3 per cent second-property stamp duty surcharge.
Another significant benefit lies in the exemption from Prudential Regulation Authority (PRA) changes to rental calculations for commercial and semi-commercial property owners. In cases where a borrower possesses multiple properties, commercial lenders may not subject the background portfolio to stress tests like Buy-to-Let (BTL) lenders.
The landscape is witnessing an increasing number of lenders venturing into this domain, with two primary categories emerging: high-street lenders and specialised commercial lenders or challenger banks. This growing pool of options enhances the flexibility and accessibility for property owners seeking financing solutions in the commercial and semi-commercial property sectors.
Commercial Watch Episode 1 | Exploring high-street & specialist lenders
The prevailing trend in high-street commercial rates is their relatively lower percentages, typically hovering around 3–4% currently. However, this apparent advantage comes with specific conditions and diminished loan-to-values, often capped at 60–65%. Commercial trading business loans from high-street lenders may extend up to 80%, albeit with stringent terms.
Full repayment mortgages, frequently tied to a tenancy agreement, are the norm, and personal meetings with clients are customary for a comprehensive understanding of the business proposition.
Contrastingly, more specialised lenders have entered the commercial loan arena, albeit with more limited distribution channels. These lenders showcase greater flexibility in their lending criteria, featuring streamlined underwriting processes and terms that are not exclusively tethered to tenancy agreements.
Consequently, these lenders operate at higher loan-to-values, occasionally reaching 75%, and may offer interest-only options. However, the flexibility comes at a cost, as interest rates are higher to offset the perceived elevated risk.
Moreover, some specialised lenders go beyond traditional offerings and provide second charges and bridging loans. This divergence from the offerings of high-street lenders grants brokers greater control over the overall lending process. In essence, the choice between high-street and specialist lenders involves a trade-off between the stringent but lower-risk approach of the former and the more flexible yet higher-risk landscape of the latter.