Shopping centres can come with many complications for property investors. There will be multiple elements to take into consideration. Not least of which includes all the potential leases involved.
Despite this, our underwriter, Roger Taylor, has seen evidence for this renewed sense of commercial optimism in recent weeks.
“I’ve seen a lot of enquiries for shopping centres recently,” he said. “We’ve found that a lot of our more experienced investors are showing more of an interest in large commercial properties. This makes sense – a big retail hub can be intimidating for newbie investors.”
Different types of leases
Often though, with large shopping centres, there comes many different leases to factor in. This can add complication to a deal, the kind some mainstream lenders may be unwilling to get involved with.
But, as Roger explained, we have resources at the ready to tackle these kinds of complications. “We do not shy away when a large number of commercial leases are involved in a case,“ he said. “To make sure this kind of investment would work at Market Financial Solutions, we’d review all the leases involved, and partner with trusted solicitors to comb through the details.”
Assessing the leases thoroughly would be especially important. Certain details within them may end up complicating an investment if left unchecked.
“We would review the leases to check the term – the contracted years – along with the rent involved. We’d be looking for any onerous restrictions that might be a problem for underwriting the case.
“A common example: there could be a break clause in 12 months’ time which means the tenant can leave at their leisure.
“This would mean the property could end up not producing income, which could jeopardize the borrower’s exit strategy.”
Income generated from a commercial investment is a crucial piece of the exit strategy puzzle. It plays a role regardless of whether an investor plans to move onto long-term finance, sell an asset, or otherwise cover the loan.
“We’d make sure the income generated from those leases would be sufficient to cover the loan and/or exit strategy – regardless of the types of businesses involved. We would use a digital long-term commercial calculator to figure out what capital we could raise to ensure the client could cover our loan.”
Challenges in the market
Taking these precautions is a necessity in the current market. There’s no getting away from the fact that the commercial property world has faced many challenges in recent years.
The pandemic upended how we live and work, hitting demand for offices and other commercial spaces in the process. On top of this, the commercial market also had to contend with the same economic issues that have afflicted other parts of the economy.
A cost-of-living crisis, rising interest rates, and subdued demand have all led to fairly pessimistic investing environment. But, even with all this, there may be pockets of opportunity out there.
In London, for example, many landlords are being drawn away from the residential market to the commercial one. They’ve had enough of short-term volatility, and are instead seeking stability from lower turnover business tenants, and longer leases.
What’s more, many may be surprised at how well the commercial property market is performing in the current climate. Even with everything going against it, average commercial property yields shifted upwards to 6.84% in October 2023, according to Carter Jonas.
The outlook for the commercial market may also be on the up. Landsec, one of the UK’s largest landlords, believes 2024 will bring with it plenty of buying opportunities in commercial real estate.
So long as a client’s exit strategy, is sound, and the investment makes sense, we will do everything we can to deliver funding.
Brokers out there with clients thinking about moving into the commercial market should reach out. We can accommodate everything from investments in single stores, through to sprawling multiplexes. We want to hear from commercial investors of all shapes and sizes.
