"The breathing space afforded by the bridging loan means the landlord can get the fundamentals right for the property - and for their portfolio as a whole."
Most investors, irrespective of the asset class they are putting their money into, will focus on diversification. Doing so is a crucial tactic not only for maximising returns, but also protecting against those occasions when the market feels a little difficult.
This is particularly true for property investors. We know from our conversations with advisers that while investing in traditional buy-to-let properties has become less attractive, there is still an appetite for backing other forms of property investment. While some have looked at the holiday let market, other savvy investors have recognised the opportunities afforded by the semi-commercial space.
The positive yields on offer from mixed-use properties have caught their eye, while the dual nature of tenancies for these properties acts as a nice protection against the potential dangers of prolonged rental voids.
Yet finding the right financing for such properties has become more complicated of late, with the pricing for ‘standard’ semi-commercial mortgages turning less attractive following the recent spate of market upheaval.
Adapting to changing circumstances
One crucial element for all property investors is the ability to change course when circumstances require it and to adapt the plans when necessary.
That flexibility has been a particular driver in the interest we have seen in the semi-commercial bridging space. Borrowers are able to secure a decent rate and the funding they need in the here and now, but also have more options open to them for if – and when - the interest rate environment cools down.
Also, the lack of early repayment charges on these loans means that if rates do start to fall, then the investor is able to react by moving onto a long-term form of funding, at a time that suits them.
Contrast that with the landlords who are signing up for five-year deals at 12%-plus. That may seem the right option at present, and it’s true that it will provide some certainty, but the reality is these borrowers are now locked at that rate over an extended period.
If rates do decline sharply - and given the pace of change that we have seen in pricing in recent years, that would not exactly be a shock - then these borrowers will have to pay extensive exit fees if they want to refinance.
Laying the foundations
Opting for the bridging loan route also allows investors to make some changes to the way their business operates, to lay the groundwork to help secure more favourable terms on longer-term finance down the road.
The breathing space afforded by the bridging loan means the landlord can get the fundamentals right for the property - and for their portfolio as a whole. That may mean allowing the income to stabilise after a sticky few years, regearing the portfolio as a whole, or even carrying out improvements to the property to ensure it is right for the future and is delivering the maximum possible income.
By putting this time to use, the investor will then be in the best possible position to secure long-term finance at a more competitive rate as and when competition within the semi-commercial market picks up again.
Understanding the needs of borrowers
If lenders truly want to support this area of the market – and we certainly do at Tuscan Capital - then you have to put in the time and effort to genuinely understand both the market and what borrowers are looking for.
Flexibility is a big aspect here. At Tuscan Capital, as long as the commercial element amounts to less than 60% of the total square footage, we can price it as a residential deal. This may not be an approach expected by advisers and brokers, but borrowers enjoy the benefit of it and the more competitive pricing available as a result.
A focus on the service of these cases also makes a real difference. Semi-commercial cases may qualify for our Fast Track process, and we are able to utilise a Short Form valuation, meaning borrowers secure the funding they need that much faster, as well as saving on legal fees.
Time is so often of the essence in all areas of property finance, particularly where investors are involved. Whether it is a case of purchasing a new semi-commercial property, or finding new financing against an existing investment, being able to meet the needs of the borrower quickly is essential.
Semi-commercial is an area of the market where demand from investors is going nowhere. It is therefore crucial for advisers to pinpoint the lenders who have the flexibility, attitude and approach to truly support such clients.
