Big potential in commercial investment

Following on from last week\'s article, the owner- occupied business premises market is not the only area in which your clients may be seeking funding. Investors who have historically only invested in the buy-to-let market are now seeking opportunities in the commercial investment market. Intermediaries have a variety of funding options for such a purchase.

The investment market can be split into four sectors – blue chip investment property, good quality investment, secondary investment and speculative investment.

Blue chips are the most sought after and tenants will usually be either major public companies or government bodies. Lease terms may vary substantially and the funding available will depend on these terms and the level of rent receivable. Normal LTVs do not apply, with some lending institutions prepared to go well above published criteria if the rental yield and lease term allow.

Unfortunately, competition to purchase these types of investments means they fetch low yields, restricting the loan facility available. Rates as low as 0.75% over the Bank of England base rate are available for the right proposal.

Good quality investments are more readily available and generally fetch a better yield than blue chips. Tenants will usually be large companies with good credit ratings on reasonable term leases. Lenders are keen to assist with such purchases. Terms can be negotiated, with loan serviceability from rental income being of more concern than LTV. Rates are higher than for blue chip properties, but rates of between 1.25% and 1.5% above base are not unusual.

Secondary investments, while fetching higher yields, have limited appeal to lenders. Tenants are small local businesses and there is a higher perceived risk of them failing to meet lease obligations. Greater emphasis is placed on applicants’ backgrounds and whether they would be able to service borrowing costs should their business fail. Competitive terms are available, but the strength of the applicant rather than the tenant will determine how competitive.

The most difficult investment to fund is the speculative investment – a proposal involving a client purchasing a property with a view to letting it out but with no tenant in place. Obviously, the borrower will have to service the costs from the date the mortgage completes, but may not benefit from rental income until later. The quality of the applicant is even more important here, and this type of purchase will be restricted to applicants with reasonable background income. The valuer’s comments regarding the property’s ‘letability’ are also vital.

So a host of opportunities exist for your clients in the commercial investment marketplace. It is always worth discussing the proposal with a reputable specialist. andy young