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Here at Advocate Finance, we can arrange many different kinds of Buy-To-Let Mortgages and other types of Commercial Mortgages and Loans. As just about any property buyer knows, all mortgages can have their complexities. But if you are looking for a Semi-Commercial / Mixed-Use Property Mortgage, then you are definitely going to need specialist advice.
What is a Semi-Commercial / Mixed-Use Property?
There are other possible combinations of property which could fall under this definition, but in the UK, one type in particular forms the vast majority of such properties. This is where a retail business is on the ground floor, with living accommodation above.
In many town centers and on suburban high streets, the archetypal example consists of a terrace of shops (often referred to as a ‘shopping parade’) facing the street at ground level, whilst at the rear, there is a parking / goods loading area with steps leading up to a balcony with entrances to the living accommodation on the first floor, above each shop.
Sometimes, both the retail property and overhead residential accommodation are rented together, so that the owner / leaseholder can live above the shop. More often, the two units are rented completely separately.
Should I Consider an Investment in a Semi-Commercial / Mixed-Use Property?
Given their complexity and the higher level of risk involved in taking out this kind of mortgage, this kind of investment is probably not for a beginner. Of course, if you are actually looking to open a shop as your primary business, that’s a different matter. But here we are really referring to landlords already invested in the buy-to-let market who are looking to expand.
Perhaps you have already built a small portfolio of rental properties in the residential market, and are looking to expand into other areas for potential investment. Venturing into the commercial rental market presents additional issues – it’s a less familiar market to you, with different rules, regulations and market characteristics. On the other hand, potential rewards and rental yields can be greater than sticking to the familiar residential market. As ever, the decision to invest is very much reliant on your attitude to risk and the potential risk / reward ratio of the two options.
Mixed-Use Mortgage – Residential / Commercial Split
One of the major differences to be found when looking for a semi-commercial / mixed use property mortgage is the added complexity of the valuation process. The mortgage must be split between the residential element of the loan and the commercial part. Factors involved include the total value of the property, total floor area and the balance between the floor areas allocated to each of the two elements.
Although traditional banks do sometimes agree to take on such loans, they are not really specialists in this area. This means that loans from a big name bank can take longer to arrange, are likely to be less flexible and will generally end up costing more.
At specialist mortgage brokers like Advocate Finance, we prefer to work with a variety of commercial banks/lenders, which tend to be more flexible and are able to offer a greater range of potential mortgage options. This means that it can be easier to arrange a customised mortgage, optimised for each individual case.
Pros & Cons of Investing in the Semi-Commercial / Mixed-Use Property Market
|
Pros |
Cons |
| Although there are additional risks involved in commercial lettings, investing in semi-commercial / mixed-use properties offers one very significant advantage over a purely residential buy-to-let.
You have the potential for two sources of income. Should one or the other element of your shop / flat become vacant, you could still have the other part continue to pay you an income. With a purely residential buy-to-let, a vacant property delivers no income at all. |
Mortgage interest rates are likely to be higher than for a standard buy-to-let mortgage. |
| Commercial renters tend to prefer longer leases. They will be spending money on decorations, fixtures and fittings which will be difficult to relocate. Also, they will be building up a loyal local customer base, which may be reluctant or unable to continue shopping with them if the business moves. | Getting a valuation for a semi-commercial / mixed-use property is more complex than for a standard buy-to-let and will certainly be more expensive. |
| Rental yields from commercial properties tend to be higher than for residential (see ‘Market Indicators, Rental Yields’ below). | Commercial tenants tend to take longer to find than a typical residential tenant. |
| It is possible to rent out both parts to one tenant | |
| Many high streets have increasing levels of vacancy rates. Some local councils will allow conversion from commercial to residential use in these circumstances. | |
| The Stamp Duty rate for semi-commercial properties is significantly lower than the residential Stamp Duty rate. |
What are the Market Indicators?
General Housing Market
There is a considerable amount of analysis and research which is available to help you decide on the feasibility of investing in the semi-commercial / mixed-use property market. CBRE is one of the world’s largest commercial real estate services and investment firms, and it produces a highly regarded annual report on the UK market. Its Market Outlook report for 2024 predicts the general housing market to remain reasonably flat when compared with 2023, with both prices and sales remaining at a similar level to last year.
Rental / Buy-To-Let Market
For the buy-to-let market, again CBRE predicts a relatively stable picture, although there is more underlying turbulence. Higher interest rates, tax changes and stricter regulations have meant that many landlords have opted to leave the sector. However, this has been matched by an increasing imbalance in supply and demand, with tenant demand rising and the number of properties available for rent falling. CBRE therefore predicts that rent values will continue to rise, which is good news for the buy-to-let landlords who have chosen to remain in the market.
Commercial / Retail Market
For the commercial market, the pressure is still on. The competition from online retail continues, and in many non-food markets, real life ‘bricks and mortar’ retail sales continue to struggle to match the pre-COVID levels seen in 2019. The overall picture is difficult to judge: retail vacancy rates are relatively high at just under 12% at the beginning of 2024, but this overall average conceals a vast inconsistency between types of retail outlet and geographical location. Out-of-town retail parks have done relatively well, shopping centers less so. High street performance varies widely depending on location, with some doing well, while others have plenty of long term vacancies.
Rental Yields
Rental yields can vary a great deal by region and type of property. Track Capital are reporting average buy-to-let rental yields throughout the United Kingdom of over 4%, with Scotland in particular performing much better than the average. For commercial retail, Savills report an average high street yield of 7% in January 2024.
Savills are also particularly optimistic about future prospects for the year, predicting that relatively low levels of development “will put downward pressure on vacancy rates in all sectors, including retail, and this will in turn deliver rental growth.” [Savills Market in Minutes: UK Commercial, published 9th February 2024].
Overall Outlook
The decision as to whether to venture into the semi-commercial / mixed-use property market will be largely dependent on a landlord’s attitude to risk. Commercial property is a very different market to residential buy-to-let, which offers both risk and reward. Yields are likely to be higher, but so are vacancy rates. It can take longer to find a new tenant for a retail property, but once found, they tend (on average) to stay longer. The advantage of the ‘mixed-use’ aspect can also be a big plus – with the possibility of one part of the property continuing to provide rental income while the other is vacant.
How can Advocate Finance help?
We are experts in Semi-Commercial / Mixed-Use Property Mortgages, having already helped many our of clients achieve their Semi-Commercial / Mixed-Use Property dream. Our team of experienced property finance advisers can assist if you have any questions.
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