There might be another option for buy-to-let landlords who want to bypass the Government's tax changes.
Tax changes are making life unappealing for residential buy-to-let investors, but are there other ways to make money?
Britain is a nation of shopkeepers. At the last count there were 539,000 outlets in the UK retail sector – around 10% of all UK businesses – employing a combined total of 4.4 million people, according to the Office for National Statistics.
But these shops aren’t just sources of income and jobs. They’re now in demand from investors that have grown tired of the mounting tax burdens on residential buy-to-let and are searching for other ways to make money.
Private investors entering the market
It’s a theme highlighted by Savills, the global real estate services provider. In its recent analysis of deals taking place for UK shopping centres and high streets, it revealed an increasing number of private investors had become involved.
Its report revealed more than £4.5 billion of transactions took place in the high street shop market last year – the highest level since 2010 – with many of these in London.
The volume outside the capital was a more modest £1.8 billion:
“This has been driven by a sharp rise in private investor interest in the sector due to the low interest rate environment, as well as some investors having moved out of residential buy-to-lets and into high street shops,” it read.
Residential buy-to-let changes
When you consider the tax changes taking place within the popular residential buy-to-let world, it’s understandable that people are finding this area less appealing, according to Patrick Connolly, a certified financial planner with Chase de Vere.
The combination of an extra 3% Stamp Duty payable by anyone purchasing a property in addition to their main home, and changes such as mortgage interest not being taken into account when working out taxable profits, are taking their toll.
“The profitability of buy-to-let investments is threatened by tax changes announced by the Government,” says Connolly. “These are already hitting the attractiveness and profitability of many buy-to-let investments and we could conceivably see further tax charges announced in the future.”
Benefits of buying commercial property
The yield – or income return on an investment – is often higher on commercial premises than residential, which is obviously attractive to investors.
Businesses will also sign longer leases and take on responsibility for many of the costs normally met by landlords, such as general maintenance. Of course, this will all depend on the terms of the lease agreed.
Gary Smith, a 64-year-old investor from Cambridgeshire, has both residential and commercial properties – and insists the latter are much easier to manage and potentially more lucrative.
“I have bought a couple of shops that are already let on relatively long term leases to tenants that have been there a while,” he says. “Commercial property is easier as you are less involved with the day-to-day management of the site.”
He also maintains the return he’s received from his shops has outweighed that of the residential properties. “When something breaks down in a house then you have to deal with the problem but in the shop most things will be down to the leaseholder.”
Consider the potential downsides
The biggest problem with buying a commercial property as an investment is not being able to find a tenant. These vacant periods are a nightmare for landlords, which is why reliable, long-established tenants are valued highly.
This is a reason why Graham Porter, head of UK property research at Aberdeen Asset Management, is worried about by the rise in the number of private investors swarming into the commercial buy-to-let arena.
He points out that customers are increasingly drawn to stronger, out-of-town locations that have attractive leisure facilities. Most outlets in these areas, he suggests, are out of the price range of privateers.
“A trend towards people buying retail units in what are likely to be secondary locations and weaker towns is concerning because there’s clearly a higher risk of prolonged vacancies in these areas,” he says.
Buying in an area where footfall is reducing could mean having to drop the rent quite substantially in order to secure a tenant – and if you want to use it for anything other than its pre-agreed commercial use you’ll need to apply for change of use.
“Retail is not a risk-free option,” he says. “Whether people can get a high enough yield to offset the vacancy rates is open to question but it feels like a riskier strategy as they’ll be in a vulnerable position if they can’t find a tenant.”
It’s a claim backed up by specialist lender Aldermore, which points out that vacancy rates are at a gloomy 12.5% across the entire retail sector. Retail parks are the lowest at 5.7%, while in some areas of the country the rate is 20%.
Perhaps even more alarming is the fact that one in three vacant units stays that way for an entire year, points out a spokesman. “Vacancy rates should be a key consideration of any investor,” he adds.
How much does property cost?
Prices vary depending on what you’re buying and its location. For example, you can currently buy a small shop in Cromer, Norfolk, for around £135,000 that’s let out to a charity paying £9,600 a year.
Those with bigger budgets, meanwhile, can pay £475,000 for a fully-let block of six retail units in Newark, Nottinghamshire, that’s bringing in annual rent of £48,000.
As far as commercial mortgages are concerned, they typically run between three and 25 years, according to Moneysupermarket.com. Most are offered on a variable rate basis with the level charged decided on a case-by-case basis.
The amount you can borrow will be determined by the rental income generated by the investment – but won’t exceed 65% of the purchase price. You will also need to factor in various arrangement fees so ask the lender what will be applicable.
On top of the purchase price you’ll also need to factor in the cost of legal advice, as well as Stamp Duty Land Tax if the property is valued at more than £150,000. Buyers pay on increasing portions of the property price.
In addition, you may have expenses such as decorating and refurbishing the site – particularly relevant if it’s an old building or has been empty a long time – as well as fitting the space with furniture and equipment required by future tenants.
Other costs to consider
Of course, buying the actual property is not the only cost involved – particularly covering periods where you may not have a tenant. These charges can include insurance, repairs, general maintenance and cleaning, as well as security and garbage collection.
Then there are business rates that are charged by the local authority for most non-domestic properties.
How much this will be depends on the property’s ‘rateable’ value – which is its open market rental value, based on an estimate by the Valuation Office Agency.
Generally, you don’t have to pay them for the first three months that a building is empty – but after this you’ll pay the full amount.
How to choose a property
The first step is deciding what type of commercial property you want to buy as they are divided into ‘use classes’ that determine the ways in which they can be occupied.
These include shops, financial and professional services, restaurants and cafes, takeaways, storage and distribution, industrial, hotels, and residential institutions.
Next you have to consider the location. Do your research on towns, find out what’s happened to footfall in the area, and consider whether there are – or are likely to be – any out-of-town shopping centres that could provide damaging competition.
There is no shortage of commercial properties for sale on specialist websites such as Rightmove, although you would be advised to speak to local estate agents and business groups in order to get a feel for the opportunities.
Not sold? Have a look at some residential buy-to-let mortgages with loveMONEY
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