One of the more interesting conversations we are currently having with real estate agents is about the growing interest in homes with a commercial element.
More professional landlords are starting to explore where semi-commercial real estate fits into their investment strategy, and are becoming more conscious about the way they build their portfolios and the role each acquisition plays in it.
For most investors, this isn’t about replacing traditional rental properties. It is about broadening a portfolio with assets that serve a different purpose and complement existing investments.
Recent commentary from the NAEA Propertymark Commercial Advisory Panel reflects what we are seeing ourselves, pointing to an increase in inquiries from landlords interested in diversifying beyond the residential market and gaining a better understanding of the various commercial, tax and regulatory considerations involved.
It’s likely that brokers will see a similar increase in inquiries from investors looking to expand. So what should you take into account when placing these things?
Why do customers consider semi-commercial?
The first phase is to understand why the individual investor looks at semi-commercial. Understanding their specific motivations is essential in finding the right financing partner, as very different factors can be at play.
Do they want to diversify for its own sake, moving beyond a portfolio dominated by traditional residential properties? Are they attracted to the different income characteristics that semi-commercial real estate can offer and do they want to improve the overall performance of their portfolio? Or perhaps they want to reposition and reshape their portfolio for the future, with semi-commercial real estate part of that strategy?
The best real estate agents recognize that advice is more than just finding products; it’s about combining the investor’s strategy and intentions with a lender that can support them in the long term.
Considering both tenants
One of the attractions of semi-commercial real estate is the ability to generate income from both residential and commercial elements. This can provide greater resilience, but also brings new considerations; After all, finding a commercial tenant is different from finding a residential tenant.
It is critical for real estate agents to understand this part of the business. What type of business does the landlord focus on? Is there already a tenant and how safe is it? And if not, how does the investor plan to attract them?
Semi-commercial real estate can offer more stability than traditional rental properties, in addition to the potential for stronger returns, but that is only feasible if the investor has the right fundamentals. Brokers are the key to steering them in the right direction.
How complex is the case?
Semi-commercial businesses generally contain complex elements, although the degree of complexity can vary considerably. It’s not just about the different lease structures or determining an accurate valuation. If the investor is planning renovation work or a change of use, these are further considerations that should be understood from the outset.
Looking at each of these elements separately rarely provides a complete picture. Understanding how they fit together often determines whether a case runs smoothly. That is why perceived acceptance remains so important in semi-commercial lending.
Just as all cases are different, so too are lenders in the semi-commercial space. While some lenders prefer to keep complexity to a minimum, others have the underwriting expertise and flexibility to assess more involved scenarios. If the matter is not clear-cut, it will greatly influence the choice of lender.
Add up the sums
The semi-commercial conversation is evolving, and lenders’ proposals must evolve with it. Across the sector, we need to ensure we deliver results for investors looking to add semi-commercial real estate to their portfolios.
For some transactions, a ready-made option will be sufficient. But for others, that flexibility will be crucial. Brokers need to identify not only those lenders that can support more complex semi-commercial businesses, but also those that actively listen to the market and continue to develop their proposals as investor demands change.
The approach of investors is changing
The way people invest in real estate continues to evolve. Professional landlords are taking a more considered approach to building their portfolios, thinking not just about acquiring more properties, but also about how each investment contributes to long-term resilience and performance.
Semi-commercial will not be suitable for every investor. But as landlords become more conscious about how they build their portfolios, the conversation is becoming less about whether semi-commercial has a place and more about when it makes strategic sense. Brokers who understand these broader investment objectives, alongside the lenders best placed to support them, will be well placed to help clients make better long-term investment decisions.
Alex Upton, director, mortgage and bridging finance specialist, Hampshire Trust Bank