Commercial Mortgage Market: Where to Invest in 2021

As big names disappear from our High Streets, and many businesses suffer in the wake of the pandemic, you might assume that commercial property investment is a no-go. Commercial mortgage expert, Andy Elley, explains why you have more opportunities in commercial property investment than you might first assume.

Despite the ongoing challenges posed by the pandemic, resulting in a long list of High Street retailer casualties (including some notable names), we’ve continued to see a steady flow of commercial mortgage enquiries over the last few months. Both commercial investors and owner-occupiers are actively seeking commercial mortgages, demonstrating the immovable resilience of the sector. 

I’ve been a commercial mortgage broker for over 20 years, and before that worked as a Business Manager in a High Street bank, looking after small to medium-sized businesses. I know only too well how much the commercial property investment sector is at the mercy of the economy, but have also witnessed first-hand how the commercial investor community adapts and seeks new opportunities in the face of adversity. The Coronavirus pandemic crisis has been no different. 

Commercial Property Investment: The Last 10 Years 
In 2012, when the property market started to recover in earnest from the 2008 credit crisis, property investors predominantly focused their attention on residential property. As prices in this market climbed, so did rental tenant demand. However, the introduction of the stamp duty surcharge on second homes in March 2016, and the start of the phased removal of income tax relief threw something of a spanner in the works. At the same time, we were beginning the see rising trouble in the High Street; as more of us went online for our shopping, the more physical shops started disappearing from our towns and cities. 

It was here that investors spotted lucrative opportunities; primarily, converting redundant commercial units into residential dwellings. Even in my reasonably rural town of Crowborough, East Sussex, I have seen over three residential multi-unit developments spring from ex-commercial properties in a very short space of time. With the continued pressure for new housing, I don’t see this trend waning any time soon! 

Commercial Mortgage Lenders Reaction to COVID-19 
As I’m sure you’re aware, the headcount at many High Street banks significantly reduced after the 2008 credit crisis. Many of those made redundant at the time utilised their knowledge and experience to forge new careers in the finance sector; we have several ex-bankers here at Mortgages for Business, now exceptional mortgage brokers! 

Why is this relevant? Well, since the crisis, these banks have continued to work with less staff, meaning that when COVID hit in March 2020, there weren’t enough hands to deal with the onslaught of applications for Coronavirus Business Interruption Loans (CBILS) and financial support packages. While the buy to let lenders got their act together reasonably quickly, most commercial mortgage lenders were essentially closed to new business. I’m not criticising them; I know the commercial lenders were working flat out to try and get lifeline cash out to understandably panic-stricken business owners. When it became clear that the CBILS wasn’t working the way it should due to unachievable affordability calculations, the Government launched the Bounce Back Loan; and what a feast that became! I’m sure sleep has been a little easier for those businesses who have used these support packages prudently, although I’m aware we’re not out of the woods yet! 

With commercial mortgage lending extremely hardto secure, our team at Mortgages for Business initially turned to bridging and other specialist lending sources to help our clients through. As 2020 progressed, lending opportunities slowly opened up; however, the main High Street banks were only accepting gold-plated applications which fit their significantly restricted criteria. In the main, the challenger banks have turned the commercial lending tap from an intermittent drip to a slow but steady flow. As you’d expect, commercial mortgage pricing has increased; the continued financial uncertainty means calculating lending risk is virtually impossible! 

Commercial Property Investment Opportunities for 2021 and Beyond 
While this may seem a pretty bleak outlook, I promise you it’s not. As I said at the outset, property investors have a knack for finding opportunity where to the untrained eye, there is none. Drawing on my experience and conversations with clients, here are some of the primary opportunities commercial property investors can expect in the coming year(s): 

Permitted Development 
Harsh though it sounds, we will see a flood of commercial property entering the market in the coming months; from small to medium retail assets through property auctions and commercial estate agents, to larger corporate sell-offs of freehold property. During the 2008 credit crunch, we saw lenders asking corporate chains to sell off property to reduce leverage, and I fully expect this to happen again (unfortunately the most likely victims will be pubs and restaurants). Another consequence of this is that many financial covenants will be broken, leaving larger operators reviewing their longer terms strategy and overall viability. 

Now that working from home is the new normal and likely to remain so for many businesses, we expect many purpose-built office spaces to become underutilised. Typically situated in places with good transport links and local amenities, these will be prime development spots for new residential dwellings. 

Although international travel is not totally off the cards, it will take several years to recover from this pandemic. Summer 2020 was a bumper year for UK holiday let properties, and we’re fully anticipating the same and more in 2021. I have several clients who are diversifying their property portfolio to take advantage of this expanding market! With that in mind, holiday let apartments and houses in holiday-hot-spot locations will be big business, so there’s another development opportunity (and investment opportunity) that could again come out of vacant commercial units. 

A well-stocked market usually means one thing: competitive prices. Paired with the permitted development changes, making it easier for developers to convert vacant commercial property into residential dwellings, well, it doesn’t take a mathematician to see there’s money to made here. As long as you’ve got the right experience (or an experienced team behind you), lenders are likely to favour projects which will feed the ever-increasing demand for homes. 

Commercial Owner-Occupier  
We’ve already seen an increase in enquiries from business owners looking to purchase property from which to run their company. Often, their existing landlord has offered to sell them the property before putting it on the open market; others have found recently vacant property, which perfectly suits their businesses’ requirements. 

If purchasing your own business premises is something you’re looking to do, the real crux with the lenders at the moment is reassuring them that your business has faired well during the pandemic, backed up by several years ofstrong accounts to prove it and management information from your last year-end to date. For example, we’ve recently had great success with a city orthodontist, likewise a butcher-baker family business who purchased the semi-commercial property they had been tenants of for many years.  

If you’re not sure what type of businesses lenders are backing at the moment, then do get in touch and I can advise whether you’ll meet criteria at the moment. 

Location, location, location 
It goes without saying that cities will always be densely populated and need the commercial infrastructure to support the “city lifestyle”. However, with many of us now keeping close to home and looking to shop in smaller, quieter places, retailers in suburban and rural local communities may prosper more than pre-COVID. I’ve certainly seen a real rise in support for small business owners during the pandemic, and it’ll be no bad thing for local economies if that continues! While criteria don’t allow for huge scope here at the moment, when we do emerge from lockdown (vaccinated and rearing to go), I anticipate the lenders to have this in mind when expanding their criteria and considering applications. 

What next? 
In all honesty, I can’t see the High Street banks returning to pre-COVID lending levels much before 2022. They’ll take a cautious, wait and see approach and underwriters will only support the very bestlending requests. There will be more consideration around factoring in CBILS and Bounce Back Loan measures to their affordability calculations, which is likely to impede the amount you’ll be able to borrow from them. Similarly, Loan to Values (LTV) will remain low in specific sectors (e.g. hospitality and leisure) until we see more stability in the market and the banks can ascertain the true impact on businesses’ profits. 

This all means that the challenger banks and specialist commercial lenders will have an opportunity here, and it’ll be brokers like Mortgages for Business that will be able to get you access to the finance solutions you need. The market is there, you just need to be clever about securing the mortgage, and the best way to do that is with help from expert brokers who know the ins and outs of the market. 

If you have any commercial investment or owner-occupier plans that you’d like to talk over, please do not hesitate to contact me, Andy Elley, on  07964916503 or 01732 471644, or email me 



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