Homebuying has long been something of a national pastime in the UK. The proportion of the population that own their own home massively outweighs those living in rented accommodation and is certainly far greater than in many other European countries, where renting is more commonplace. And yet when it comes to company premises, leasing is very much the preferred option.
That may all be about to change, however, with an increasing number of lenders arriving in the commercial mortgage market bringing with them a far wider choice of products than has been available up to now. “Building societies have traditionally been among the leading providers of business mortgages, with many professional groups – such as accountants, solicitors and vets – often buying rather than renting their premises,” says Neil Johnson, policy manager at the Building Societies Association.
“This can often be as a consequence of the nature of those businesses. They are often established by a relatively affluent individual who can afford to buy the premises knowing that when they come to retire they will have an asset as well as the business that they can sell,” he adds. “Many societies are also looking to diversify their lending, however, and move into new areas.”
Trends in the business mortgage arena are hard to identify. While it is not necessarily the case that huge numbers of small businesses are turning their backs on the traditional rent/lease option and taking out mortgages on their business premises, the options and opportunities for doing so are clearly broadening.
“If a business finds itself in the position where it is able to buy its own premises, then clearly it will look at doing so,” explains Nikki Cann, associate director at the National Association of Commercial Finance Brokers (NACFB). “Renting is often seen as dead money in the commercial marketplace, just as it is in the residential one. One trend that is becoming clear, however, is that there are increasing numbers of lenders entering the commercial mortgage marketplace, which means that there is greater choice for a business now. Businesses that would have had difficulty in getting a commercial mortgage five years ago now have a number of different lenders who will consider lending them money.”
According to Jonathan Moore, head of marketing at Mortgages for Business, business mortgages are usually priced and negotiated on a case-by-case basis, depending on the personal and business circumstances of the borrower and the strength of their company. “Most high street banks and traditional lenders will want to see three years‘ accounts, while some of the new specialist lenders take a more flexible approach to the marketplace,” he says. “Firms with short trading histories or imperfect credit are now fundable, as are those with limited accounting information.”
Mortgage market
David Willetts, director at small business consultancy DAW Consulting, claims there is another reason why some
business owners might consider taking out a mortgage rather than renting office premises. “A commercial mortgage may be the only option available to a business owner with a poor credit record and possibly county court judgments served against him,” he suggests. “In addition, some types of businesses may be too high a risk for the conventional fund providers. Some commercial mortgage providers now add greater weight to the individual‘s ability to repay rather than the person‘s past record. Typically an acceptable form of security would include retail shops, factories, warehouses, office buildings, hotels, land, pubs and farms.”
Because the range of mortgage products on offer has grown so significantly, this has become an environment in which you are far more likely to find a solution that suits your business than would have been the case just a few years ago. “Multiple new specialist business mortgage lenders have now entered the marketplace such as Commercial First,” adds Moore from Mortgages for Business. “The days of your local high street bank being your only option in terms of finance are gone.” He claims that it can make sense to have your day-to-day banking and mortgage with different providers because having all your products with one lender means that company has total transparency over your portfolio and could use that information when deciding whether to lend money and, if so, at what rate.
Why the sudden interest from lenders in this sector? According to Fraser Mackay, head of commercial marketing at Barclays Business Banking, research suggests that up to 10% of firms with a turnover of more than £50k hold a commercial mortgage. In addition, figures suggest that commercial mortgages are not typically ’small ticket‘ loans: 63% of loans are for over £100k, while 41% are in excess of £200k. In addition, against a backdrop of rising levels of insolvency, lenders are looking at ways of stretching their business into longer-term arrangements, easing the short-term cashflow issues that many of their customers face.
For many owner/manangers of small businesses, their only prior experience of mortgages is restricted to their own home loan. But the NACFB‘s Cann suggests
that commercial mortgages should not necessarily be viewed in the same way as their residential counterparts since they can also be used as part of a much more bespoke funding vehicle. “A commercial mortgage as a source of funding doesn‘t need to be taken in isolation,” she explains. “A good broker will have a look at the whole picture of the business and design a package that suits that individual business.
“For example, where a small business owner/manager might believe they need a commercial mortgage with an 80% loan-to-value, a broker might look at the deal and consider the possibility of leasing arrangements on some of the equipment, or a factoring and invoice discounting arrangement to help with cashflow,” she says. “This could free up more capital to allow the business to pay a larger deposit and, in turn, secure a lower rate for its commercial mortgage. At the same time, the flexibility of the business‘s finances has been increased.”
Safe as houses?
Property has long been seen as a fairly safe long-term investment, so could there be merit in a business looking beyond simply owning its own premises and buying additional commercial property to let for additional income? Stuart Barton, president of the NACFB, certainly thinks so. “If done correctly, you could have a situation where tenants in part of the property can effectively be paying the mortgage for you,” he explains. “That means that your business itself is living rent-free.”
Taking out a commercial mortgage for an additional property can also assist with the lending process itself, he adds: “If you can prove a tenant is involved in your proposal to purchase a property then it can certainly help the lender to get his head around the proposition.” The latest report by the Royal Institution of Chartered Surveyors revealed that rental yields on commercial property has remained stable, with offices currently showing the best performance, although even in this sector the rate of increase has slowed down.
But outside the office market, rental growth was muted, at 2.7% for retail property and 1.4% for industrial space, and with interest rates likely to rise still further before the end of the year, this is not an investment decision that should be entered into lightly. It‘s also worth noting that the last Budget announced that business tax relief on empty commercial properties would be reduced, so any business owner investing in buy-to-let commercial property needs to be confident that it is highly rentable.
However, the current consensus is that – unlike other forms of investment – property will at least hold its value, even if it won‘t necessarily bring the kind of return that the residential market has seen in recent years. A well-advised purchase could just be the key to the long-term stability of a business‘s operation. “Any business looking to purchase its premises would be wise to seek the advice of a broker before taking the plunge,” says the NACFB‘s Carr. “As with many things, it‘s usually better to shop around to secure the best rates and a broker can take the legwork out of that.”