The trend for landlords to invest in semi-commercial
I recently read with interest two pieces of detailed research into the private rental sector (PRS), they explored the present challenges confronting residential landlords in the UK and uncovered future strategies. They both reported that while landlords are finding the market tough, the majority are thankfully still committed to the PRS.
Firstly, the Deposit Protection Service (DPS) found that “significant structural changes” are taking place inside the PRS, due to the type of landlord that is looking to exit the sector. Double (24%) the proportion of landlords with two or fewer properties are planning to sell up and leave the rental market, compared with those who have portfolios comprising more than 10 properties (12%).
In addition, three times the proportion of landlords with portfolios of more than 10 properties plan to buy more compared with those who own one or two (13.5% compared to 5.6%).
Meanwhile, research from the Intermediary Mortgage Lenders’ Association (IMLA) found that the buy-to-let market is chiefly supplied by small business people making modest profits out of their rented properties. This is contrary to the popular belief that landlords are making large margins off the back of “more financially constrained tenants''. In fact, IMLA’s Landlord Survey found those with mortgages are looking at the likelihood of struggling to break even in the next two years, with their cost of borrowing rising by up to 80% as they refinance from historically low fixed rates.
The good news from IMLA is that the majority of landlords plan to stay in the PRS for the longer term. In fact, 53% of mortgaged landlords plan to buy more rental property over the next five years, as do 25% of unmortgaged investors, while only 21% and 17% respectively say they will sell property during that period.
Where the yields are
Beyond the scope of both pieces of research was whether landlords who look set to remain were planning to diversify their portfolios, but at London Credit we know from talking to investors that the ones who are in a position to pivot their strategy are looking at higher-yielding assets, such as semi-commercial.
We find that for landlords who haven’t previously moved out of their residential property comfort zone, semi-commercial is a good place to start diversifying. That’s because it’s effectively an extension of what they already know – residential: a semi-commercial property is one which has both commercial and residential elements. Walk along your local parade of shops and you’ll see flats about the commercial outlet on the ground floor.
A key benefit with semi-commercial is that all the landlord’s exposure isn’t in any single sector. If the residential sector starts under-performing, for example, then the fact that they also have an asset in the commercial sector is to their advantage. Equally, having tenants across both residential and commercial tenants minimises the threat of completely void periods, as it is unlikely that both components of the investment will simultaneously become vacant.
How bridging can help
Bridging finance can be a great solution for those looking to branch out into semi-commercial, with the positive attributes that are associated with residential bridging equally applicable to semi-commercial bridging finance. For example, speed is just as much an advantage in semi-commercial bridging as it is in residential.
Meanwhile, bridging lenders will usually have higher maximum loan sizes in semi-commercial than they do for residential. At London Credit we will lend for commercial or semi-commercial purchase or refinance up to 65% loan to value (LTV) and £3.5m.
Equally, those brokers who are just new to semi-commercial will already understand the requirements and process of a residential bridging loan and as a consequence shouldn’t find the semi-commercial aspect completely alien to them. At London Credit, we’re used to working with brokers who may be new to bridging and understand that some may need more ‘handholding’ than others. We do the same with those new to semi-commercial.
It’s heartening to know that the majority of landlords in the UK aren’t looking to exit the market because of a tough couple of years, but they may need help finding sources of higher yields. Brokers should therefore maintain a dialogue with their clients and explain how semi-commercial is an area worth exploring.
Constantinos Savvides, Head of Underwriting at London Credit
