I think it’s fair to say that over the past couple of years, buy-to-let homeowners have had the proverbial kitchen sink thrown at them. Stamp duty surcharge on second homes, changes to mortgage underwriting standards and ever-shrinking mortgage interest tax relief associated with Brexit and Covid-19, it seems there has been a conspiracy to help to curb buying to let buying activity.
In such an environment, we find that investors are diversifying beyond “vanilla” buy-to-let to maximize profits and spread risk, which means considering trading as an alternative.
The reasons are understandable. The main attraction of commercial real estate is its exemption from major tax changes that have hit residential buy-to-let, including the phasing out of mortgage tax relief. Stamp duty rates on commercial properties are capped at 5% on £250,000, while residential land stamp duty (SDLT) rates can be as high as 12% (on properties over £1,500,000).
Even so, investing in commercial real estate is not without risk and potential investors should do their homework. The commercial real estate market is all about valuing the flow of income, its certainty, regularity and security.
The checklist for anyone looking to invest
Estimating the value of a commercial property is more difficult than in buying to lease due to the greater range of factors that can affect it. A valuation is therefore a little more complicated than a residential property, which should impact both the decision-making of the investor and that of a lender. The following three considerations will help decide if a property is a wise investment.
First, investors should look at physical aspects such as location, size, condition, layout of the property, whether it has parking or whether it is close to good transport links. Make sure your client can hire a reputable independent expert to ensure that the necessary checks have been carried out. Likewise, encourage them to do their own due diligence – spend time in the area, ask questions, and read as much as possible.
Second, there are legal concerns such as the nature of the lease, its duration, break clauses, the possibility of rent review and liability for business rates.
Finally, there are the economic factors to consider such as occupancy rates elsewhere along the street. This includes everything from how long other places stay in the market to whether it is a rich zone. This also applies to tenants they accept – it is better to have a stronger clause which is more likely to stay in place even after a difficult phase in business.
What should potential investors and brokers know?
For those considering the transition from residential to commercial purchase, there are a number of differences between leases that landlords should be aware of.
In general, commercial tenants tend to sign longer leases, some of which can last for decades. However, break clauses are common, with tenants often having to adjust to rapid expansion or decline.
There are additional health and safety responsibilities that would not apply to a residential property. Fire, electricity, gas, fixtures and fittings, and asbestos all have different regulations that a commercial owner should consider. The Code for Leasing Business Premises in England and Wales was published in 2007 and outlines the responsibilities of landlords and commercial tenants. Although not a legal requirement, it is useful to know what tenants can expect from their landlord and what competitors might offer.
In short, there are a range of hurdles facing a client looking to get into commercial buy-to-let, but there are good reasons to do so. These decisions are only made more complex by the current economic environment. But it underscores the broker’s valuable role in these circumstances, helping to educate clients and navigate through the myriad of decisions they must make. For brokers looking to branch out into trading, not only will this additional expertise be an added value for current clients, but as more owners turn to this route, it could also be an alternative source for new business in the future.
How InterBay Commercial can help you
At InterBay Commercial, we are well equipped to help you with commercial case. Our experienced sales, real estate, underwriting and fulfillment teams have the knowledge to navigate the complexities of business cases and will work in partnership with you to find the best solution for your clients. Speak to one of our specialized financial account managers today to learn more about our latest commercial products.
FOR INTERMEDIARIES ONLY.
Emily Machin, Specialist Finance Manager, InterBay Commercial