"For investors, the success of buy-to-let is a hard act to follow but could commercial mortgages act as a successful stand-in? "
The recent avalanche of buy-to-let tax changes however mean that for many investors the golden age of buy-to-let is over; so, is now the time for commercial mortgages to step into the limelight and take centre stage?
High net worth clients tend to be entrepreneurial spirits and as such are typically not ones to invest all their eggs in one basket. Buy-to-let ticket sales may have slowed but for high net worth clients the show must go on; and on it will, as they look to place their assets elsewhere and diversify their risk.
They are not the only ones. According to recent research from the National Landlords Association, 20% of its members plan to reduce the number of properties in their buy-to-let portfolio in the next year – the highest level of intended property sales in 10 years. So could commercial be the next hot ticket in town?
Real estate advisor, Colliers International recently reported that UK commercial property transactions reached £55bn in 2017 with expectations that they will once again exceed £50bn for the sixth consecutive year in 2018.
It anticipates that while sterling remains competitive against the US dollar, further new entrants, particularly from Asia, will enter the UK commercial market.
A further Colliers’ prediction is that the industrial market will be the top performing core asset class as competition for space drives up rents, particularly in London and the South East.
Change of scene
For investors, the success of buy-to-let is a hard act to follow but could commercial mortgages act as a successful stand-in?
One of the main reasons high net worth clients are drawn to commercial mortgages is the attractive returns it offers compared to other asset classes.
According to real estate firm Savills, the current five-year outlook for commercial property as a whole is average rental growth per annum of 1.9%. Forecasts for industrial property are higher at 3.7% per annum to 2021 supported by increased demand on the back of the growth in online retailing.
Retail warehouses and leisure parks currently command some of the biggest yields at around 5.00%.
One of the benefits of commercial property is that lease lengths are often much longer than one would expect from a residential property.
According to the MSCI UK Lease Events Review 2017, the average property lease length averaged 7.1 years in 2017, a small decline of 0.1 year compared to 2016.
Here at Investec Private Banking, we recently carried out a commercial mortgage for a high net worth client who had built a hotel to specification for a well-known hotel chain. Historically he may have turned to the buy-to-let market for his investment needs but due to the recent tax changes he opted for commercial. He wanted to borrow £5m on a property worth £10m, with guaranteed rent for twenty years.
As investors continue to feel nervous about the buy-to-let market, I increasingly expect to see commercial mortgages having a bigger part to play.
