If you're exploring property investment options and want something that offers strong yields and long-term stability, semi-commercial property is well worth considering. In this blog, we discuss what semi-commercial property is, why it’s gaining popularity, and how to finance it effectively.
What is a Semi-Commercial, or Mixed-Use, Property?
A semi-commercial (or mixed-use) property combines both residential and commercial elements. A typical example would be a retail unit on the ground floor with flats above. This blend offers a unique opportunity to diversify your income streams within a single investment.
Why Choose a Semi-Commercial Property Over a Standard Commercial or Buy to Let?
One of the main draws for property investors is the mix of residential and commercial tenants, which can help mitigate any unexpected rental void periods and other risk factors. Yields on semi-commercial properties are often higher than those on standard buy to lets, making them a great alternative for experienced investors looking to maximise returns.
How Do Lenders Assess Semi-Commercial Property?
Lenders will assess the income generated by the property's commercial and residential parts. A lease must be in place if you're relying on commercial income. The strength and stability of that lease will play a key role in the lender’s decision to offer on the property.
What Deposit Do You Need to Invest in a Semi-Commercial Property?
Semi-commercial deposit requirements are similar to standard buy to lets, as you’ll typically need a minimum of 25% of the property’s value.
Can First-Time Investors Buy Semi-Commercial Property?
It’s possible but not easy, and most lenders prefer applicants with some landlord experience. While some lenders will consider first-time investors, you can expect to pay higher interest rates.
What Are the Challenges Surrounding Semi-Commercial Property?
Valuations, especially post-COVID, can be tricky, as we're seeing a trend of down-valuing commercial units.
Demand for the commercial element is also a factor to consider. If there are already some empty units nearby, it could negatively impact your valuation and loan-to-value ratio.
Are the Commercial and Residential Elements Underwritten Differently When Assessing for Risk?
Yes, lenders assess the two elements quite differently.
Residential units tend to be straightforward. Even if the flat is currently vacant, lenders will often factor in the potential rental income, provided it’s in a lettable condition.
Commercial units, on the other hand, are underwritten with more caution. Lenders typically require a lease to be in place, and most will want to see at least two years remaining on it. The strength of the lease, including the tenant’s covenant, the type of business, and the lease terms, can significantly influence the lender’s appetite and the overall loan terms.
If the commercial unit is vacant, lenders won’t consider speculative income. This can reduce the amount you can borrow, so it’s important to discuss how the tenancy status will affect your application with your broker.
Will the Commercial Tenant Type Impact the Mortgage Offer?
Yes, and it can make a big difference. Lenders will look closely at the type of business occupying the commercial unit. Stable sectors, like retail in a prime location, are generally easier to finance. Offices can be more difficult as the rise of hybrid working has affected demand.
Leisure units, such as pubs or restaurants, are currently harder to finance due to ongoing pressures in the hospitality industry.
How Do Lenders Value Semi-Commercial Property?
Valuations will vary depending on the lender and the property.
In many cases, lenders will use the investment value approach. This involves applying a multiplier to the rental income generated by the commercial lease and calculating the property's worth as an income-generating asset. The strength of the lease, the tenant's covenant, and the sector they operate in are all factored in.
Alternatively, the property might be valued on a vacant possession basis, assuming it is empty and looks at what it would sell for on the open market. This method is more common when, as the name suggests, the commercial unit is vacant, or the lease is short.
Ultimately, the valuer’s comments will guide the lender’s decision. If the valuer sees strong demand in the area and a solid tenant in place, that can support a higher valuation.
Can Rental Income from Both Elements Be Used to Support the Application?
Yes, but as mentioned above, there are conditions to this.
Commercial income can be used if there’s a lease in place, ideally with at least two years remaining. Lenders won't include any projected or speculative income if the unit is vacant, which could limit your borrowing.
Again, the residential income is more flexible. Even if the flat is empty, lenders will usually factor in the rental income as long as the unit is in a lettable condition and ready to go on the market.
What Are the Pros and Cons of Investing in Semi-Commercial Property?
Cons:
Valuations can be challenging: If there’s low demand in the area or nearby units are vacant, you could face a down-valuation
Cost of borrowing is typically higher: Rates are more expensive than standard buy to lets, and lenders may charge a premium if it’s a complex case
Limited lender appetite: Not all lenders are comfortable with semi-commercial, especially if the commercial tenant is in a higher-risk sector or the lease is short
Pros:
Higher yields than standard buy to let: Semi-commercial properties deliver stronger returns, particularly when the commercial unit is let on a solid lease
Long-term yields: A well-established commercial tenant on a fully repairing and insuring lease can provide consistent income with fewer maintenance responsibilities than residential buy to let
Reduced exposure to rental market fluctuations: The commercial element can help offset any rental demand or pricing changes
How Can Working with a Mortgage Broker Help?
If you’re considering a semi-commercial investment and want tailored advice, we’re here to help.
At MFB, we’re a whole-of-market brokerage with access to a wide range of lenders. We’ll assess your application, speak to lenders and valuers in advance, and ensure you’re in the strongest possible position before submitting. Our goal is to help you secure the right finance for your investment.
Call us on 0345 345 6788 or submit an enquiry here.
