With the financial dynamics of traditional residential buy-to-let suffering so much change of late, it’s no surprise that investors are turning to commercial and semi-commercial letting opportunities.
We have seen a steady uptick in the number of existing landlords reviewing their portfolios and considering a rebalance to include some commercial stock. The yields on offer are more attractive, reflecting the heightened risks involved in letting property to a business tenant, and there is strong demand.
Lenders have correspondingly upped the availability of commercial mortgages, with competitive rates available from high-street banks for quality commercial deals. The best rates are currently around 3 per cent to 4 per cent over base/Libor for those who qualify, with some securing terms under a 3 per cent margin, although many bigger banks will consider lending only to those who have their business banking accounts with them.
This is not a prerequisite, but it helps build a borrower’s case if the lender can see the cash position of the business. Fees are usually between 1 and 2 per cent.
Specialist lenders are also eyeing the opportunities in commercial. Indeed, new lender Redwood Bank opted to launch with a range of deals specifically tailored to portfolio buy-to-let and commercial mortgages.
Specialist commercial mortgage rates tend to be 1 or 2 percentage points higher than the mainstay banks because criteria are more flexible. While traditional banks may not offer any commercial investors interest-only terms, specialist lenders broadly go up to 10 years on interest-only.
Rates across commercial are not fixed to products as in the residential market but are priced based on a comprehensive assessment of risk. This covers the security, the borrower and, critically, the tenant, plus the latter’s creditworthiness, business sector and length of lease.
Although lenders have spent the past few months reviewing criteria, there are still some obvious gaps. The market is crying out for some movement from lenders on vacant commercial terms. The majority of lenders won’t consider lending on an untenanted commercial property, insisting that, if the borrower wishes to purchase before letting, they fund the void period with bridging finance before refinancing to a commercial loan.
This works, but it is an expensive option for borrowers whose finances are carefully calculated based on commercial mortgage costs. Packaging a deal that requires two consecutive mortgages at different rates and for uncertain timeframes is do-able, but it is complex and requires strong experience in the commercial market.
Lenders often insist on professional support for borrowers who take this course; and often other security or income is needed to supplement affordability assessments.
Innovation on this type of deal is sorely needed. Especially where the market is strong, rents are high and tenant demand is rife, there must be a way for lenders to structure a commercial loan with initial vacant possession — perhaps through interest retention to cover up to a three-month void at the start of the loan.
This would have the advantage of being a far simpler financial commitment for the borrower, with just one arrangement fee payable. For the lender, interest retention can be profitable and the borrower is more likely to stay with it for the longer term. Two rates of interest could even be applied on a bridge-to-commercial type basis — although obviously this necessitates lenders doing both types of finance.
Brokers have long been at the coal face with customers, and we understand their needs. We would happily share them with lenders looking to differentiate in this increasingly competitive market, and indeed often do.
Lucy Hodge is managing director of Hodge Lifetime