Buy-to-letters set up shop

Buy-to-let landlords are turning to commercial property in their search for higher yields and greater stability. Sarah Moore explains.

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Shop for yield on the high street
(Image credit: Vesnaandjic)

Buy-to-let landlords are turning to commercial property in their search for higher yields and greater stability, says Alexandra Frean in The Times. The number of residential landlords diversifying into commercial property has tripled in the past three years, according to auction house Allsop, in part due to tax changes that are set to make buy-to-let a lot less lucrative for investors than it once was.

"Where you increase the tax burden in one sector of the market, the money will look very quickly for where it can gain some small advantages," Duncan Moir at Allsop tells Frean. Since most buy-to-let landlords are already familiar with the residential property market, they don't want to get out of housing completely, he adds so they are instead opting for mixed-use properties, such as shops or restaurants, with a flat above them.

There can be several benefits to diversifying into commercial property. First, there's tax: commercial and semi-commercial property is exempt from the additional stamp duty that now applies to the purchase of second homes. The changes to tax relief on interest expenses for buy-to-let landlords that will take effect in April 2017 (see our website: MoneyWeek.com/slashCGT) will also not apply to commercial landlords, even if units haveflats attached.

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Second, gross rental yields are generally higher in this sector, because of the guaranteed rent increase structures often built into tenancy agreements. Commercial tenants also tend to cover several costs that residential landlords would usually pay for themselves, including insurance and repairs. Finally, commercial leases can produce a more reliable long-term income, as businesses tend to be more willing to sign up to a longer lease than residential tenants.

However, be aware that high-street banks can be "inflexible" when it comes to commercial lending, David Whittaker of mortgage broker Mortgages for Businesses tells Olivia Rudgard inThe Daily Telegraph. Providers are less likely to offer interest-only mortgages, and will often only lend for the period of an existing lease. "It's an illiquid market, so lenders want to see you paying down the capital over the period of the loan." Investors should also keep in mind that rates will usually be higher than with residential loans, and that banks may increase non-fixed rates in response to market fluctuations.

Small firms face soaring business rates

Small retailers and rural businesses face crippling business-rate hikes as a result of changes that come into effect on 1 April 2017. The government has argued that revisions to the rateable value of properties on which business rates are based will cut rates in struggling northern towns. But critics say that headline figures disguise huge increases for mostly rural businesses that tend to occupy larger areas of land, and those in areas where property prices have soared since rates were last revalued in 2008.

Riding schools, livery yards, kennels and other businesses will face some of the steepest increases in England, says Lucy Bannerman in The Times. For example, riding centres will see average increases of 356% in the southeast, and average increases of 180% in the rest of the country, showing that they are being put at an "unfair disadvantage by a bricks-and-mortar tax based on premises, not profitability", says Sarah Phillips of the British Horse Society.

Small, independent retailers in cities claim they will be squeezed out by larger national companies, who occupy similar-sized lots but who are often more profitable. The Department for Communities and Local Government has said that no small business will see an increase of more than 5% this year, and pledged £3.6bn towards relief. But many retailers say this is not enough.

"London is going to be particularly hard hit because property prices have continued to rise," Jeanette Winterson, who owns a delicatessen in London's Spitalfields area, tells The Guardian. She plans to close her business because the rateable value has soared from £21,500 to £54,000. "Those who are already paying high rents simply won't be able to meet this."

Sarah is MoneyWeek's investment editor. She graduated from the University of Southampton with a BA in English and History, before going on to complete a graduate diploma in law at the College of Law in Guildford. She joined MoneyWeek in 2014 and writes on funds, personal finance, pensions and property.