Commercial property refers to any premises that are used for business and can be loosely divided into two distinct sectors. Large scale business ventures include entire retail parks or multi-storey office complexes, sophisticated developments that need equally large corporate investment. Small scale businesses are individual shops, cafes or workshops and many of these can be termed as semi-commercial properties because they include a residential flat above. Recent market trends are indicating that a growing number of private buys to let investors are showing more than a passing interest in small commercial and semi-commercial properties.
Why The Residential Buy To Let Market Has Declined
Investors who once viewed becoming landlords in the buy to let residential property market as a lucrative form of income, have seen their profits eroded by recent legislation. Stamp duty on new property investments requires an additional 3% surcharge. Prospective landlords are also discovering that their projected rental income must cover new mortgages at a ratio of 145% instead of 125%. More recently, landlords’ tax liabilities are placed on their revenue and not on their profit. As a result, they can no longer claim tax relief on their mortgage interest. And when seeking to re-mortgage for further investment, landlords are obliged to justify their whole portfolio before a loan is approved.
Advantages of Investing in The Commercial Sector
Whereas some buy to let landlords are hoping to recoup their losses with the higher returns of multi-occupancy properties, others are beginning to reap the benefits of commercial or semi-commercial investments. Not only are the returns on a commercial buy to let property considerably higher for a comparable investment, but with a semi-commercial venture there are two rents to be gained. Prospective tenants of commercial buy to lets are seeking to make long term commitments providing investors with a stable income for the foreseeable future. Further security is offered through the annual rent increases of such properties being closely aligned to inflation. Even the initial investment appears to be better value as the purchase of a commercial buy to let is not subject to the 3% surcharge on stamp duty that affects residential properties. When trying to secure a mortgage for commercial buy to lets, lenders are more interested in the projected income of the business in that particular property as opposed to assessing a landlord’s entire portfolio.
The Way Forward
The risk of investing in commercial rather than residential property is much greater due to the reliance on the tenant’s success at generating an income. That risk can be considerably lessened if an investor has a thorough knowledge of a prospective tenant’s business venture. And not all flats in semi-commercial properties are leased to the business below, providing an investor with two independent rental incomes. Prosperity within the residential market was enhanced by the popularity of buy to let schemes. With the advantages of similar strategies in the commercial property market, it seems that investments could be on the increase.