The market conditions indicate that demand for commercial buy-to-let mortgages is likely to build rapidly. Eight per cent of all commercial property purchases in 2005 were made by private individuals, and we believe this market alone to be worth £4bn annually. In the residential mortgage market, although it is estimated that 11 per cent of all housing stock is held by private investors, owner occupiers are the most dominant group and consequently act as the overall price setters for residential property. The commercial property market, on the other hand, is actually dominated by investors, with these investors being institutional rather than private individuals. Recently we have started to see a cross over of these two markets as private individuals energised by residential buy-to-let ownership are beginning to add commercial property to their portfolios.
There are a number of reasons why commercial property is starting to appeal to the private landlord. The underlying performance of the commercial property market has been extremely strong, with commercial property averaging an annual return of 11.5 per cent over the last five years. In addition, property yields on commercial property average between 5 per cent and 8 per cent depending upon location and tenant quality. Thirdly, in contrast to the residential short term assured short hold tenancy leases that provide for six month break opportunities for the tenant, in commercial lease arrangements lease terms are typically between five and ten years with a break clause at year five. An advantage of these longer lease terms is that investors and their agents will have less management and tenant maintenance to deal with. Not only is there less maintenance but, with longer terms leases, many tenants are more likely to upgrade the property themselves, potentially helping increase the capital value for the landlord.
When considering properties for commercial investment, the basics clearly remain the same, i.e. location, location, location – but there are a number of different property types to consider as opposed to the standard house or studio flat. Typically investors are looking to purchase three key property types: industrial property, retail property, and office space, each of which come with their own key features for successful investment. For example, with industrial property it is important that the potential investments are sited near to relevant raw materials, skilled workers, suppliers/customers and with good communication links. Retail property is an asset class that provides a wide variety of potential tenants and good retail units in good locations have been some of the highest performing investments. The RICS Q4 2006 survey highlighted that the amount of available retail property fell for the first time in 18 months, lifting surveyor confidence over the rental outlook to a six year high. With office space, again, investors must consider the amount of supply locally, together with proximity to important transport links. The condition of the office space together with parking facilities can make a big difference to the attractiveness of property to tenants.
Residential landlords are recognising that as their numbers grow the capital values of residential property continue to grow and the rental yields are shrinking. They have begun to understand the potential of commercial property, ironically a market dominated by investors in its own right. There are new challenges to the BTL landlord in this field, but the benefits of diversifying into a different property class, the higher returns available and the potential benefits of longer leases with less aggravation can normally combine to make the risk reward equation work.
Commercial First recently unveiled a new range of investment mortgages, aimed at the growing number of landlords looking to add commercial property to their portfolios.
The Commercial Investment Mortgage Plus (CIM+) range of products has straightforward criteria, requiring the market rent of the property to cover just 100 per cent of the mortgage repayment and the applicant to provide evidence of good conduct on another investment property, either residential or commercial. The product can fund up to 85 per cent of the property value and a range of interest-only options are available, including interest-only payments for the full life of the loan.
Stephen Johnson is Sales and Marketing Director, Commercial First
