Lenders' shifting definitions help investors diversify from the fiercely competitive buy-to-let space
Brokers say activity in the semi-commercial and mixed-use market is accelerating as lenders relax how they define qualifying properties. The move is creating new opportunities for diversification but also exposing inconsistencies in how such cases are assessed.
Guy Nyirenda, pictured above left, of Altura Mortgage Finance, said more lenders are targeting the sector as competition in traditional buy-to-let tightens. “We have seen more lenders move to lend in the semi-commercial and mixed-use space as the margins are being squeezed on standard BTL properties,” he said. “The competition in the traditional BTL space is large at the moment as well, so looking for under-supplied areas of lending presents new opportunities for lenders.”
He noted that definitions differ widely between lenders. “Lenders classify the definition of semi-commercial differently, so understanding how each lender in the market defines this is key to placing business,” he said. “The simplest definition is the majority of the property (over 50%) being residential, then the rates are lower and they can deem this as residential for lending purposes.”
Nyirenda added that nuances such as whether the residential proportion is measured by floor space or value create further variation. “We have seen one lender (Together) recently increase their allowance for the commercial element to be up to 60% of the floor space, demonstrating exactly how lenders are trying to grab a bigger slice of this space.”
He said greater competition has given brokers access to more deals and simplified costs once associated with full commercial borrowing. “The increase in competition and more lending availability for this type of loan allows brokers access deals that they may not had previously had if they do not have access to the more commercial lenders,” he said.
Michael Lennie, of GO Financial Services, said the surge is being driven largely by borrowers diversifying beyond standard buy-to-let. “Because we have worked with several of our clients for almost half a decade, and watch them build substantial residential portfolios, there comes a point in which diversification is desired by borrowers,” he said. In Scotland, more tenant-friendly regulation in the buy-to-let market has also encouraged landlords to branch into semi-commercial property “where they can make use of things like FRI leases which are perhaps a little more landlord friendly”.
Feeling the squeeze
Valuation and affordability remain recurring hurdles. “Valuations can be a sticking point if the commercial unit is vacant, which we have seen now and again,” Lennie said. “Stress tests / affordability can be another one … if those are historic tenants that are maybe paying below market rent, this can have an impact on affordability and stress tests as the yield isn’t quite there.”
Adding to that view, Rebecca Wilkins, pictured above right, of Cutting Edge Mortgages, said lenders have steadily widened their reach. “Over the past 3 years we have seen lenders diversifying into these areas by expanding criteria and stretching what types of properties they can accept,” she said. “With pressures on tax and landlords feeling the squeeze I have seen some trying new avenues such as mixed use properties. These being less in demand, sometimes a deal to be had on them and thus results in higher yields.”
Wilkins agreed valuations can still frustrate deals. “Valuations are always the bane of a brokers life however I haven't seen anything significant in comparison to the residential side,” she said. “Affordability is trickier on semi comm unless you are buying with sitting tenants. Planning only comes into to it if the client is buying to then flip into resi housing from commerical. Bridging tends to be the way forward with that rather than a first charge where the criteria can halt any progress on a change of use.”
Nyirenda said underwriting becomes more complex when the commercial income is essential to make a deal work. “If the rent from the commercial is needed to make the lending work, then this makes it trickier as the lenders assess the commercial tenant in terms of stability, lease, market demand etc., more thoroughly,” he said. Surveyors often value the commercial portion on a vacant-possession basis, which “may mean the property is undervalued and the lending is affected”.
Specialist lender Together recently raised its threshold for semi-commercial classification, allowing up to 60 per cent of floor space to be commercial — up from 50 per cent. Tanya Elmaz, managing director of intermediaries, said: “Expanding our criteria for semi-commercial products not only offers brokers more opportunities to place cases, but also offers clients more flexibility. This change opens doors for people who may have found ideal homes to support their businesses but have been struggling to access finance due to the commercial / residential ratio.”
With competition intensifying and borrower appetite broadening, semi-commercial lending is edging closer to the mainstream. Yet brokers agree that the segment will remain a specialist’s game, where experience, lender knowledge and accurate valuation remain key to turning flexibility into completed business.
