Semi-commercial should be the domain of experienced landlords, claims broker

On 18th October, Bridging & Commercial and InterBay Commercial hosted a virtual discussion on semi-commercial finance and the rise in this ‘step up’ from standard BTL.

Medianett’s managing director Caron Schreuder moderated the roundtable, and was joined by Emily Machin, head of specialist finance at InterBay; Lucy Barrett, managing director and founder of Vantage Finance; Jason Berry, group sales and marketing director at Crystal Specialist Finance; and Matthew Rowne, director at The Buy To Let Broker. 

According to Emily, landlords taking the next step in their investment journey typically meant moving into the HMO space. Now, owing to Covid and a lack of available stock, there has been a shift.  

“Landlords were probably of the opinion that semi-commercial was complicated . . . from a lender’s perspective, we are seeing much more of it — especially from landlords experienced in BTL already, but who are now looking to see how they can improve their overall portfolio,” she explained.

However, she emphasised that working with expert brokers was key in this more complex class. 

When asked what has driven this uptick in attention on semi-commercial, Lucy believes that it is based on demand. 

“There was a real lack of sensible products for semi-commercial, and the high street just isn’t there to support this type of investment,” she detailed. Her experience is that clients are looking for a decent interest rate and LTV, but it has been capped at, say, 50%,   which is “too capital intensive” for landlords.  

Although criteria for these products have hardened in recent years, Lucy is seeing a growing realisation from lenders that they have to be in the market for what landlords want, resulting in slightly more competition for semi-commercial offerings.  

Jason identified that many amateur landlords have “matured their structures”, perhaps through the creation of a limited company and a formal framework, and are now more likely to consider expanding their portfolios. “Then you have the serial professional landlords who have perhaps always wanted to take advantage of semi-commercial opportunities, but are now  increasingly exploiting the change-of-use and permitted development rules.”   

The panel agreed that the planning changes were welcomed and that they allow for greater interchangeability regarding the types of businesses, and for security to become more agile.   

“Anything that reduces bureaucracy and enables speed should be embraced,” Jason enthused.  

Consequently, those in search of better yields and advantages over standard dwellings will gravitate towards this asset class. 

“The increase of house prices over the past five years has led to higher asset costs and lower yields. Semi-commercial security can [carry advantages] from a tax perspective, and they often have longer leases attached to the commercial element, allowing for longer planning for landlords,” Matthew stated.  

He added that, for some, it can be considered a steppingstone to full commercial investment.

“It is more complex, and I do think it’s the domain of the experienced landlord,” Matthew continued, adding that there is additional due diligence required upfront when sourcing security and a greater depth of advice required for financing and leveraging this sort of asset.  

From an underwriting point of view, Emily commented that, while InterBay does not necessarily mind what the split is between the residential (or uppers, as it’s known) and commercial elements, both lease agreements (such as whether it’s an HMO or AST on the top, and if there’s separate access) need to be known in order to assist with risk weighting.  

Often, having two leases to consider for debt coverage means that a lender can be a bit more flexible on the commercial portion — if the rental income is strong enough to cover the loan repayments.   

While the type of tenancy is vital when it comes to regular BTL transactions, the commercial tenant itself and what the demand is for that type of business is an important factor in semi-commercial.  

Lucy highlighted that, nowadays, most leases are for a maximum of five years, which rules out the majority of high-street providers. This means that the options lie within the challenger bank space — many of which will work off vacant possession rather than the investment value.

But, why is this? “If you have a tenant in situ, has it been let at the appropriate amount? If you only have a couple of years left on the tenancy, if they leave, [a lender will ask], ‘Who comes in next?’ If it was to be re-let, will it be for less?” Lucy commented.  

Jason would like to see lenders widen their criteria to support borrowers in this area, without the assumption that this means taking on more risk. He explained that Covid and its associated challenges should not rule out what were once “pristine” tenants and borrowers. One way of doing this is to increase dialogue with brokers to ensure that solutions are being shaped with the customer in mind. “The days when lenders could lift and drop products onto the market without collaboration are long gone.”  

Watch the full virtual roundtable below:

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