Goodbye buy-to-lets, hello commercial lets
Goodbye buy-to-lets, hello commercial lets – why now could be a good time to switch
Buy-to-let landlords have certainly been dealt a few blows over the past year, many of which originated from former Chancellor George Osborne's 2016 Budget announcements.
First there was the news of a 3% Stamp Duty Land Tax (SDLT) surcharge on purchases of additional properties, such as buy-to-lets and second homes. Then came tax relief changes, which was phased in this April and will be fully implemented by 2020; at which point, landlords will only be able to claim tax relief at the basic rate of 20%, even if they fall into a higher income tax band. And to top it off, the 10% wear and tear allowance for furnished properties has also been scrapped.
Making the switch
Understandably, the new tax rules have resulted in residential landlords selling up in droves. In an AXA report published in April, over 40% of landlords said they will be worse off as a result of the changes. As a consequence, 21% said they plan to sell all of their rental properties, while 10% would reduce their portfolios.
The report also revealed that 7% of landlords are considering switching to commercial properties as an alternative to residential lets, as many deem them a safer option with the potential to generate greater yields. Nevertheless, as with any type of investment, there are some risks to be aware of.
If you're thinking about making the move, our guide may help you to decide whether investing in commercial properties is right for you:
The latest UK Commercial Property Market Survey from the Royal Institute of Chartered Surveyors (RICS) suggests a fairly healthy commercial market, with industrial space proving more popular than office and retail. Investor demand has increased across all sectors, with 18% more property professionals citing a rise in enquiries.
Specifically, in terms of capital value expectations of the industrial sector, 44% more respondents predicted short-term price increases – the highest percentage since Q4 2015.
A commercial portfolio
Of course, some commercial properties cost millions of pounds to buy, making them impossible for many investors to purchase outright. In such cases, investors tend to purchase commercial property through investment funds, like investment trusts, unit trusts or an open-ended investment company (OEIC).
The alternative is taking out a mortgage on a commercial buy-to-let, such as a small retail unit or offices – that is, if you can't buy the property outright.
As a Telegraph article reinstates, yields tend to be higher for commercial properties. Whereas a buy-to-let landlord may predict the value of their property to rise along with taking the rental income, a commercial yield will be greater from rent, although price increases are not as reliable.
Another plus with commercial properties is that tenants often take on the majority of costs that a landlord would have to deal with if it was a residential let. Such costs include repairs, business rates and insurance.
Meanwhile, tenants in commercial properties tend to agree to longer leases as businesses require more security. This translates into a more reliable income stream for landlords; however, at the other end of the scale, void periods are typically longer – half a year or more is not unusual.
This is Money article points out that returns on semi-commercial properties – which consist of commercial and residential elements – tend to produce higher yields compared to vanilla buy-to-lets. It cited research from Mortgages for Business, which showed that semi-commercial properties have brought in an average annual gross yield of 7.6% over the past six years, compared to 6% for pure buy-to-lets.
However, it's worth noting that you can't get a buy-to-let mortgage on a semi-commercial property, so you have to take the commercial finance route. This can be difficult for residential landlords as high street banks offering the best deals usually insist that they have experience in the commercial market.
What to bear in mind
If you're a residential buy-to-let landlord considering investing in commercial property, then it's vital that you do your research before entering the market.
Your responsibilities as a commercial landlord differ greatly from those as a residential landlord. As an example, under the Landlord and Tenancy Act, a commercial tenant has the right to renew the lease of the property that they occupy for the purpose of their business.
In any case, commercial lease contracts are more lengthy and complicated than their residential counterpart, so you'll need expert help when putting one together. Why not get in touch with Stride to see how we can help?