AFTER GRENFELL: COMPLEX RULES MAKE SAFER HOMES

The Grenfell fire of 2017 claimed the lives of 72 residents of the west London tower block. The tragedy prompted a root-andbranch review of fire safety standards across the UK and new regulations are now on the statute books. But what do they all mean for builders, property owners and leaseholders?

Words by SIMON WATKINS

Last year, the long-awaited Building Safety Act 2022 was granted Royal Assent, creating the Building Safety Regulator. By 4th April this year, the majority of developers had committed to sorting out their past mistakes. In theory at least, there is now a road map for making existing highrise buildings safe and ensuring new developments are rigorously regulated for fire safety. But it has been a long and arduous journey and, while the regulations and government initiatives have been widely welcomed, the devil is still lurking in the detail— and in the practical execution.

The first uncertainty is the lack of uniformity across the UK. Gary Strong, global building standards director at the RICS, explains: “The four nations of the UK are all doing things differently. In Scotland, they’re doing their own thing. In Wales, they haven’t yet decided whether they’re going to sign up to the Building Safety Act (but are moving ahead with remediation) and Northern Ireland is way behind.”

The result is that some of the core legislation passed by the Westminster parliament applies across the UK, but some does not. However, most of its regulations and initiatives provide a blueprint for standards likely to be adopted throughout.

Regulatory road

Before Grenfell, fire regulation was covered by the Fire Safety Order (2005), which required fire risk assessments in commercial and multi-occupancy residential buildings. According to Gary, however, the FSO left two gaps: “The problem was it didn’t say specifically that, in blocks of flats, the entrance doors to each were within the scope of the law. The fire doors at the entrances of individual flats are very important, so that was a big grey area. The second point was it didn’t include the external walls or balconies at all,” he says.

Those external walls and their cladding proved critical. The Grenfell Tower Inquiry, launched in September 2017, established that the cladding used on the tower contributed to the fire’s spread. The specific product was a type of aluminium composite material (ACM) cladding with an unmodified polyethylene core—ACM PE. Construction products were immediately on the agenda for regulatory reform.

The second key initiative was the Independent Review of Building Regulations and Fire Safety, also set up in September 2017 and led by Dame Judith Hackitt. In May 2018, the Hackitt review published a sweeping report calling for a new regulatory framework. Its many recommendations included: formal duties and responsibilities on constructors; a series of planning gateways to embed fire safety at every stage of new development; the establishment of clear duty holders for multi-occupancy buildings who should be responsible for overseeing fire safety; and new regulatory oversight of construction products.

The Grenfell Inquiry and the Hackitt report had turned the spotlight not just on ACM PE cladding, but also on a raft of fire risks in high-rise buildings. The costs and uncertainty of resolving the issues paralysed the market for leasehold flats in high-rise buildings.

“The majority of people owning properties in high-rise buildings have either not been able to sell at all or only been able to sell to cash buyers,” claims Beth Rudolf, director of delivery at the Conveyancing Association. “In most cases, sellers decided it was easier to rent their property out so they could move and, if they could afford it, buy somewhere else.”

For some conveyancers, the problems were just too much. “Before the recent building safety regulations, some conveyancers just decided they could not act on these properties because it was too niche, too dangerous, or their insurer would not be happy,” Beth says.

Thousands of properties across the UK were thrown into limbo as the likely cost of fixing the problems—and, crucially, who would pay for them—was unknown.

In 2021, the Institute of Residential Property Management and the Association of Residential Managing Agents (since merged to form The Property Institute) surveyed their members and concluded that, where cladding needed to be replaced, the average cost was £22,511 per flat. The survey found some blocks surveyed also needed other remediation, such as the installation of fire breaks, with costs averaging at £25,671 per flat.

So, how could finance providers assess the burden on borrowers and the liability inherent in affected properties?

In 2019, the RICS, working in tandem with the government, UK Finance, and the Building Societies Association, produced a system for assessing external walls and a form to go with it—the EWS1. The form is intended to demonstrate a clear assessment of fire risk of the external walls of high-rise buildings to help determine whether a property was suitable for mortgage.

The EWS1 brought its own challenges, as Gary admits. “It’s been quite controversial, but somebody had to do something. It’s been a steep learning curve, but it has worked well in the majority of cases. There are over 6,000 of these forms to our knowledge that have been created, and they have enabled lending to proceed, because it’s been possible to sign off properties as having no combustible cladding issues at all or they’ve identified a problem.”

In practice, the use of EWS1 was not consistent and, in some cases, it was applied unnecessarily. “At one time, we had forms being put in place on bungalows ,” recalls Gary.

The government made an intervention in 2021 to “reduce needless and costly remediation in lower-rise buildings”, which made clear EWS1 forms were not required for buildings below 18m.

Laws on walls and doors

The findings of the Hackitt review eventually crystallised in two pieces of regulation: The Fire Safety Act (2021) and the Building Safety Act (2022).

The Fire Safety Act requires fire risk assessments to include doors to individual flats and the risk of fire spreading due to cladding and other features, such as external walls and flat entrance doors. This closed the most obvious holes in the previous regulation. At the heart of the new rules was the Fire Risk Appraisal of External Walls (FRAEW), drawn up by the standards body BSI Group.

The Building Safety Act is more wide reaching and gives property owners and developers new statutory responsibilities. Its principal step was to set up the Building Safety Regulator (BSR) as a dedicated body inside the Health and Safety Executive. The BSR came into existence in 2022 with core responsibilities to regulate all high-rise buildings with seven storeys or more, or 18m or higher, and to have a statutory role in all relevant planning applications.

This act creates a register of inspectors, which will open in October this year.

Where the responsibilities lie Previous regulation required there to be a responsible person for safety, who could have been the management company or the landlord of the building, the managing agent, and even leaseholders; often, in a block of flats, there would be more than one responsible person.

The new regulation allows for multiple people to be accountable, but requires there to be a single ultimate point of responsibility. Jaclyn Thorburn, head of public affairs and relations at The Property Institute, explains: “Under the Building Safety Act, for higherrisk buildings there are additional duty holders—the accountable person (AP) and the principal accountable person (PAP). Although there could be more than one AP, there can be only one PAP, and the act sets out provisions for identifying who that should be.”

Jaclyn adds that the PAP for a higherrisk building will have to register it with the BSR. “That register opens in April and you will have six months to register properties,” she advises.

The job of the PAP will be considerable and, as Beth points out, everyone will be starting from scratch. “Whether it is the freeholder, sub-landlord or property manager, they will not have done this before,” she states. There will also be plenty of complex details. For example, they are going to have to check every year that the front door to every flat is fire safe. But often they won’t actually own those doors—they will belong to the flat owners. So, the PAP is going to have to enforce fire safety on the flat owners.”

Similarly, duty holders during construction—which include clients, designers, principal designers, contractors and principal contractors—have new responsibilities for communicating with each other and monitoring all aspects of building safety during construction. Under the act, developers will have to go through three gateways for planning approval.

The first, already in place, is a requirement to address building safety as part of the initial planning application. The second gateway takes place before construction of any high-rise residential building and developers must demonstrate it will comply with building regulations.

This is regarded as more than a tickbox exercise and will be assessed in the round. The BSR will need to sign off for a development to pass the second gateway. The third is a further approval required on completion. The developer must show the property built meets the standards. This final approval then forms the basis of one of the most crucial aspects of the new regulatory framework: the golden thread. This will be a perpetually updated record of a building’s safety starting from when it is completed, to then be updated throughout its history by all duty holders, typically owners. The aim is to establish a complete record of a property’s evolution, including any significant renovation and redevelopment. Gateways two and three will come into full effect later this year. In practice, given the timescale of new construction, developers will already need to consider these stages.

The Building Safety Act will create a significant burden for those putting up new high-rise buildings. “It’s a challenge in its own right,” says Gary, “whether you’re an architect, an engineer, a developer, a builder or a surveyor or whatever, it’s a lot to get your head around. There are some in the construction industry who feel it’s a bit of a sledgehammer to crack a nut. It’s complicated to process and potentially increases liability.”

The final piece of the jigsaw is a new National Regulator for Construction Products. This will sit inside the Office for Product Safety and Standards, with a specific remit to review the safety of construction material and components.

Fixing the past: paying for remediation

The future regulation of high-rise development is only half the story. Existing tall buildings that fail to meet current standards need to be made safe. How this should be achieved and who should pay have been running sores for the industry. Again, the recent regulation aims to bring clarity.

The Building Safety Act outlines a cascade of responsibility. The first line of acountability falls on contractors. In cases where the contractor no longer exists or cannot meet the costs, it then falls to landlords. Should no clearly identifiable single landlord be available, the government’s £5bn Building Safety Fund is designed to step in to cover the costs for leaseholders.

Much of the remediation work on buildings over 18m high has been completed, but this leaves a second group of buildings—those between 11m and 18m. A separate £3bn fund, the Medium Rise Scheme, was launched in 2022 to assist in these cases. This scheme remains in pilot with 60 buildings involved, but is expected to be rolled out over 2023. The scale of this task is unknown as there is no definitive list of buildings in this range— however, the Department for Levelling Up, Housing and Communities (DLUHC) estimated that there are 78,000 residential buildings between 11m and 18m as of September 2021. The same cascade of responsibility applies, with contractors the first in line to pick up the bill. This issue reached a critical stage last month. The DLUHC issued developers with an ultimatum: take contractual responsibility for remedial action on unsafe high-rise buildings or face the ire of secretary of state Michael Gove. Gove has indicated he will ban recalcitrant developers from government work and, ultimately, from carrying out any development at all.

Fire Safety Act

April: Building Safety Act receives Royal Assent

December: The biggest six lenders agree to provide mortgages on properties covered by government remediation contracts or a government remediation fund

Major developers sign remediation contracts with the government

Opting out of EWS1

Despite the caveats, the agreement reached with major contractors could reduce the need for controversial EWS1 forms. In December last year, the six leading residential lenders—Barclays, HSBC, Lloyds Banking Group, NatWest, Nationwide and Santander—agreed not to require EWS1 forms where the property can be shown to be covered by a developer remediation contract or where there are government funds to cover remediation costs. While it is not the end of EWS1 forms, the move by the biggest lenders will remove that burden from many leaseholders seeking to move or remortgage. However, yet again, a solution has created uncertainties. Beth raises the question of who will be legally responsible during a sale or remortgage for ensuring that properties are truly covered, either by a remediation contract or government funding. Her fear is that, in some circumstances, the burden will fall on conveyancers. “The trouble is the complexity. We’re hearing of some conveyancers who are refusing to act on any leaseholds and, where they are acting, they are having to put up their fees,” she says.

Gove brandishes the stick

In January 2023, Michael Gove gave developers an ultimatum: fix the mistakes of the past or face a ban from the industry.

Gove called on developers to sign remediation contracts with the government—legal commitments to repair unsafe buildings—and gave them a deadline of 13th March 2023 to sign on the dotted line.

The majority, including most of the industry’s biggest names, met the deadline. But some failed to do so and found themselves on a public list of shame. This prompted a handful to bow to the pressure and sign.

As of 5th April 2023, 46 developers had signed the contract, taking full responsibility for carrying out and funding remedial work. Four firms deemed by the government to have developed buildings within the scope of the rules have so far not signed the contract:

• Abbey Developments

• Avant

• Dandara

• Rydon Homes

Falling through the cracks

While the cascade of responsibility for remediation covers most eventualities, some people may still find themselves in limbo. If no developer can be found liable and there is no single landlord responsible for a block, the Building Safety Act is the next line of defence for “qualifying leaseholders”. Detailed provisions allow for some contributions to be required, even from qualifying leaseholders, but these are capped.

To qualify, a leaseholder’s property must be their main home or they must own no more than three residential properties in total. Consequently, BTL investors with four or more flats fall through the cracks.

BTL landlords could face large bills, warns Gary: “We’ve seen cases of BTL investors who have bought a few flats that are in their pension plan. Then they get landed with a bill for £100,000 per flat. There’s no way they can afford that, as they don’t have the protections afforded to other qualifying leaseholders by the Building Safety Act.”

He adds that the effect on this can reach far beyond the BTL landlord themselves. “It’s quite rare these days for a private block of flats not to have any BTL investors in there somewhere. So, remediation on the whole block stalls if they can’t agree to go ahead if they own four or more flats.”

Finally, the process of becoming a qualified leaseholder still requires paperwork. A deed of certificate that describes the leaseholder’s circumstances is needed. There is no formal register of these certificates and Beth urges the government to address this: “We’ve been pressing the ministry to come up with some way to register those certificates as a local land charge or with property logbooks, or be attached to the unique property reference number. That would enable everybody to identify whether a leaseholder deed certificate was ever entered into,” she shares.

Achieving safer buildings

The regulatory journey has been long and is not yet over, with numerous pieces of secondary legislation needed to fully implement details of the Building Safety Act. There is also a raft of issues on remediation, with some leaseholders still being left behind. Nevertheless, Gary’s verdict is largely positive on the recent measures: “Most of the recommendations within Hackitt’s report are coming forward slowly—and they are all sensible,” he says. “My only criticism would be the length of time it’s taking them to do it. Here we are, nearly six years after the event, and we’re only now actually getting the pieces of the jigsaw put in place. In the meantime, leaseholders who are trapped in some of these buildings are suffering and, in some instances, still with dangerous cladding on the outside and waiting for new cladding to be installed.” Despite her own uncertainties over the details, Beth is also optimistic about the new framework: “Yes, it’s complex and it has me holding my head in my hands sometimes. But the reality is it’s going to deliver safer properties for consumers—it really will.”

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A series of experts debate how the commercial property market will fare after a rough economic ride

Words by andreea dulgheru

Over the past few years, numerous macroeconomic factors have battered the commercial property space, but industry professionals are optimistic that brighter days are on the horizon.

Five commercial real estate experts— Charissa Chang, broker business development director at Allica Bank; Mike Davies, head of business development at YBS Commercial Mortgages; James Meigh, director of lending at Recognise Bank; Daryl Norkett, head of real estate proposition at Shawbrook Bank; and Emma Ross, commercial manager at Watts Commercial Finance—share their views about the sector and where the opportunities lie for investors.

Andreea Dulgheru: From what you are seeing, what does the current state of the commercial property market look like?

Charissa Chang: We always knew 2023 was going to be a challenging year, particularly in terms of volumes. With the Bank of England trying to stabilise the market—base rates have dramatically increased over the past six months— what’s clear is that customers are holding off [buying a property] unless moving is a must or there’s an opportunity that’s too good to turn down. We’re definitely seeing this affect volumes. The latest MSCI data showed a 11.9% fall in UK property returns in Q4 last year, and I think that’s a direct effect of the rate rises. There’s a working assumption there’s about 20% less transactional volume in the market— so there’s less business around, but the same amount of brokers and lenders, some of which obviously adjusted their lending appetite. While there’s been uncertainty, I do think we’re on the back end of that. There are still some great opportunities out there and that’s only going to get better now.

Daryl Norkett: That point on the MSCI data is really interesting because most of us in the industry use that as a way of understanding what’s going on with values, yields and rents. You’ve had this dynamic where values are going down but rents and yields are going up, which is unusual because, normally, rents would also start falling when there’s economic trouble—it’s all to do with the interest rate shock. However, our market is very much the SME sector and, while the MSCI reports do have some segmentation on lower-value property, most of the data is based on very large institutional transactions that we don’t typically lend on. The smaller SME investor relies a bit more on local knowledge and seeing where the opportunities are in their areas, whereas the institutional part of the market tends to be a little bit more yield-, investment- and analysis-led. I think there’s more resilience in the smaller end of the market than the data might show at face value.

James Meigh: I agree with Daryl and Charissa. What tends to happen in the property market is that it permeates from the top. All the data shows, as far as the capital markets are concerned, virtually nothing was transacted in Q4 last year. So, what we’re seeing now is a shortage of stock as a result of what’s happened at the top of the market. But I do agree with Daryl—in the SME space, which is predominantly where we’re most active—it’s all about the local investor really understanding their market and what represents good value.

Mike Davies: [YBS Commercial Finance’s] market is around the professional portfolio investor, and we’ve seen the opposite trend in the first quarter of this year. There has been a real spike in applications, and that’s because while the interest rate shock is having an impact on the market, it’s also created some opportunities. If you’ve got cash-rich investors who know their localities really well, some are starting to see good opportunities to buy—unfortunately on the back of a repossession or a portfolio that’s looking to get unloaded, perhaps. Where things have been really challenging is the ability for borrowers to pass stress tests, and this is something we looked at really closely and changed our stress testing to make it more affordable. But, overall, I think the headline data and what you see in the media can be a little bit misleading because there are still transactions out there.

Emma Ross: From my point of view, February was the quietest month I’ve ever had as a broker, which gave me pure fear, and there are a few other brokers out there who said the same. However, I’ve done more in the first week of March than in the whole of February, so this all could’ve just been a wave turn. I do see a lot of people holding back in the hopes that rates are going to drop soon. As for stress testing, that’s the biggest issue we’re having in the BTL market for sure.

JM: I think the elephant in the room is that we’ve now got a complete mismatch between interest costs and yields. Quite often if interest rates don’t start reducing, then capital values soften, and we’ve seen that in certain markets and geographies. I’m not saying that we’re facing a property crash but, for a debt-driven buyer to be able to compete with a cash-driven buyer, you need interest rates that are lower than yields—and that isn’t the case on the majority of transactions we are looking at.

AD: From your perspective, when exactly did stress testing become one of the biggest challenges for commercial investors?

MD: I think it was probably the end of last year. It was certainly an issue that we were looking at in November. At that time, we were seeing a fall in business activity because of the interest rate shock, the mini-Budget, and everything that these involved. That’s when we looked to make a change towards December to try to get ahead of that, because we were seeing the increase in interest rates start to impact affordability. At that time, for our business, this was being matched with a trail-off in applications, so it was a double whammy. That’s when we really looked at it and made some changes.

DN: Personally, I’m not sure that stress testing is the biggest problem we have in our proposition at Shawbrook. We switched our strategy around and really focused on fixed-rate products for commercial investment several years ago, even though the market traditionally worked on variable rates. That has really helped us because, like BTL, we use a pay rate debt service cover ratio calculation for five-year fixed rates. So, affordability works pretty well on most of our commercial and mixed-use stock where the yields are better than they are on a lot of the BTL deals, for example. We’ve seen steady levers of activity, particularly on semi-commercial. I think it’s more about customer sentiment around interest rates as everyone expects they’ll continue to fall further. However, I think there will come a time in the market when people accept that maybe this is where we are for a while, and that’s where I’d expect the transactional activity to pick up again. In the meantime, there are lots of investors that focus on high-yielding investment strategies. We see a lot of deals with small multi-let sites, and those yields are really strong. That activity continues where rates are not as much of an issue for the investor. It’s more about whether they can secure [the property], keep it occupied, and maintain the rent rolling in.

JM: Everybody addresses this slightly differently. On commercial property transactions on a base rate-linked facility, we’re looking at five-year SONIA and applying a bit of a sensitivity to that. The positive thing for me really is that five-year SONIA has come down by 50 basis points recently, which has clearly helped. It is a challenge, and I think it will be some time before things settle, but when we’ve got a five-year swap rate that’s actually lower than the base rate, then I think that is a fairly good barometer in terms of where sentiment is around future interest rates. We’ve tweaked our criteria, but I think it’s something that we are going to have to wrestle with for another 12 months or so.

AD: Do you think affordability will remain a challenge in the near future?

JM: If you’re looking at finer yielding assets, then absolutely. If you’re looking at multi-let industrial sites, like Daryl talked about earlier, where you’re getting between 8.5% and 9.5%, you can still make these things work with reasonable leverage. What we did—and I suspect other lenders followed suit around October—was make a decision to reduce our maximum leverage on commercial property from 75% down to 70%. However, in reality, that hasn’t affected borrower demand because it’s back to the serviceability point and the level of stress that people are adopting in the analysis.

AD: Based on the level of activity over the past few months, what have been the most popular types of deals you’ve encountered?

ER: For me, definitely bridging. Again, I think it has been used as a short-term solution to try to get themselves on a better rate later on, as they think [rates will] go back down again. Plus, it gives them time to do some work [to the property] to get good tenants in on longer leases, and then go to a tier-one or tiertwo lender with much better rates longer term.

CC: We recently increased our maximum loan size for commercial mortgages to £10m, so I’ve seen a lot of larger loans come through the doors, but we get quite a wide range of assets and sectors. When I look across the whole team, it’s a level split between investment and owner-occupied. We’re also getting a lot of the smaller, sub£500,000 cases. Apart from this, there have been more refinancing opportunities from the high street, where [borrowers] have been asked to go elsewhere. Some SMEs are now changing the way they operate their businesses and what they’re doing—they’re looking to capital raise for growth and diversification, but it’s not necessarily one property type or sector. It’s just a broad range of different opportunities.

DN: We came into the year with an enormous pipeline of commercial mortgage business. So, a lot of what we’ve done is change deal flow by altering our product; we now start commercial investment loans from £1m. One of the ways we decided to manage the risk in Q4 was to focus on those larger transactions where we can really spend the time applying the depth of expertise we have at Shawbrook to make bespoke lending decisions. Separately, we’re really focused on semi-commercial as a particular asset class, where we think there’s still good opportunity to drive a decent amount of deal flow, but it’s also an asset that is hedged to an extent, because it’s got a residential element to it. We very recently reduced our minimum loan size down to £500,000 for this type of asset.

JM: Yes, I would agree with that. We’ve got lots of clients operating in that mixed-use space. Traditional, mixed-use property is an area where we’re very comfortable. It would probably not meet an ICR or a debt-service covenant from the residential element, but you can certainly cover interest, which allows you to take a bit more of a view on shorterterm leases, re-let periods, and covenant strength of retail tenants, for example. For the retail sector, that’s something we’re still very comfortable with, as long as it’s the right deal and the right sponsor. There are still good deals out there, and it’s back to what we were talking about earlier: knowing your market and the geography. I think the tier-one lenders have got very uncomfortable with retail, whereas I think most of the finance providers around this table think that, with the right case and [client], there’s a deal to be done.

MD: We moved more towards commercial deals and launched a fixedrate product, which we’ve not had before for commercial investment. We’ve seen a good number of HMO and holiday let deals as well, almost exclusively for portfolio investors.

AD: Daryl and Mike, you mentioned that you introduced fixed rates—something that is a bit unusual in the commercial mortgage space. Has this decision been made on the back of rising demand from brokers and clients?

DN: Yes. We did it maybe five or six years ago to align the product suite with BTL. We could see the benefits of having the certainty of the interest rate payment for the customer and in terms of how we’d look at affordability. Some of our commercial business was grown by the BTL client base maturing and diversifying their portfolios into the commercial property market and, actually, they expect a fixed rate, which is a bit different from some of the investors who started with commercial property 20 years ago and are quite used to having a margin-plusbase loan structure. So, it suited our distribution and client base.

MD: We introduced the product on the back of broker feedback. While we were still seeing demand for that [commercial finance] product, every broker I spoke to was looking for a fixed rate and certainty. I think borrowers have got back to a more comfortable position now where they’re happy to take a fixed-rate option. All our products are five-year fixed terms, so we’re taking tranches and hedging, and obviously pricing is then being determined by what swap rates are when we strike the hedge. It’s a definite response to market demand—I’m just waiting for the brokers to come and put the applications in now; no pressure, guys! [ laughter ]

ER: I would say most lenders do offer fixed rates now.There are only a few commercial owner-occupied or investment lenders out there that don’t provide this option. It’s not the fixed rate that’s the issue, but rather the commitment terms. As a broker, I’m seeing a lot of lenders— particularly high-street ones—doing this five-year cap on terms. For instance, Allica Bank has committed to a client for 25 years, whereas Barclays, for example, will give a five-year fixed-rate loan and a five-year commitment term—so, at the end of those five years, [the lender] needs to get new valuations done, negotiate new fees, and they might even decide they don’t want [that client] anymore.

AD: What are the biggest areas of opportunity in the commercial property market?

JM: It’s all about sectors within sectors. If I was going to call out one area where there is real opportunity, I think it’s underpriced retail. Over the past few years, retail got hit really hard. The yields moved out, there was not a lot of investor interest, and there were lots of issues with high streets. However, in good market towns where you’ve got good footfall and plenty of chimney pots, there is some under-priced retail out there that I think a lot of investors are interested in. The one note of caution would be to look at the rents: their levels have really tanked, particularly around internal zoning on high streets. But, if you’re looking at a property where the rent has been rebased over the past couple of years and you’ve got a reasonable tenant and good footfall, I think that’s a great opportunity for the smaller investor.

DN: Yes, I would agree with that. The other thing, which is more about deal structure, is focusing on multiple streams of income. Historically, the best commercial investments would have been deemed to be one large blue-chip tenant so big they would never fail, but modern history has proved to us that no one is too big to fail in any market. Those deals tend to be low yielding, which is more challenging in a higher interest rate environment. The cases that probably look most attractive right now are those where you’ve got a spread of smaller, local SME covenants, where you can drive a high yield and investors can manage the risk through proactive asset management. Rather than relying on covenant strength, these deals rely on a spread of tenants, which means you’re not going to get too many voids at one period of time that put you under pressure.

MD: I think there are individual opportunities in the market and in localities but, where you’ve got investors who can get a spread of tenants, a range of property types, and a variety of underlying businesses, I think there is real opportunity there because the economy is still in a state of flux and people are able to diversify.

ER: I would say the best [opportunity] is a multi-unit block. For example, two flats upstairs, two offices in the middle, then two retail units at the bottom. That’ll get you sorted because you’ll have a real mixture and you can get a slightly higher rate on a semi-commercial basis. In Glasgow, you’ve got lots of them where it might be two floors of residential, the offices in the middle, then a pub and a restaurant at the bottom. I see that as an ideal [opportunity] for an investor.

DN: All of the things you’ve just described are quite management intensive, and that could potentially mean less competition from a landlord perspective. If you’re a professional property investor, that won’t scare you away because you’re geared up to do that level of property management. But, if you’re a pension fund or a very passive investor—which the commercial sector has attracted in the past because of the long length of the leases—those things might not be very attractive to you because they’re too much work. You’ve not got the management infrastructure to maximise the potential of the asset.

CC: I agree. Just to mirror what a few have already said, there’s definitely opportunity everywhere; there’s not necessarily one particular asset type.

AD: Emma, are your clients looking towards property diversification?

ER: Yes. What I’m working on a lot now is people who were residential landlords but, because the yields are so poor, they’re moving into commercial, so they are new to this market.

JM: This is where we have to be careful in how we support and assist the new commercial landlords, because that grossto-net that often gets overlooked is key when you’re looking at these kinds of opportunities.

AD: And what about the biggest challenges that commercial property investors are currently facing?

DN: If you’re an existing commercial landlord, your biggest challenges are probably trying to figure out what your property is worth and what you should be doing as you go along. We’ve gone through a period of rapid volatility in values, largely driven by interest rates. There have also been some concerns about whether we might go into recession, and there are some structural shifts happening— for example, offices adapting to hybrid working, which has stuck since lockdown. You’ve got the industrial sector coming off the back of a bubble that has burst after being overinflated during the pandemic years, but also a lot of fundamentally sound things that suggest it will still be a good sector in the future with the growth of logistics and e-commerce. There’s just so much for someone to try to figure out what to buy, whether to refinance or not, and how much risk to take on. This is the biggest problem—and all of that, ultimately, drives inaction, as people find it too confusing to make a decision. I think we’re probably still mostly in that space for a lot of existing commercial landlords, and it’s one of the reasons we’ve focused very much on semi-commercial and diversifying BTL landlords in the immediate term. However, I think that will settle down as we get into the summer and the second half of the year— it should be more obvious once interest rates have settled. I think there’ll be a lot of opportunities in commercial property in general once yields have adjusted, and that means it’ll be a good time for people to come in and buy.

CC: The market’s been full of uncertainty over the past two years, so people are holding back. I think clients and investors just need to ensure that they’re aware of all the changes that are happening, the financial impact of further rate rises and energy costs, and having clear plans. Also, I think brokers should be working closely with clients and lenders to bring it all together; there are some really good opportunities to build lasting, valuable relationships on the back of all of this. I think there needs to be a focus to help guide those customers and clients through the next period of growth.

JM: Daryl made the point that, as yields soften, he sees opportunities for investors to get back in the market but, on the flipside, investors might be sat on a portfolio that has possibly gone down in value. There might be refinancing events they need to consider. I would encourage all borrowers and landlords to engage early with brokers or lenders and have one eye on what they think the market might do and how pessimistic a valuer might be on a revaluation, and try to negotiate fixed rates wherever you can to reduce some uncertainty. Also, borrowers should work with their advisers when it comes to negotiating headroom in financial covenants to remove as much uncertainty as possible.

MD: I think that being proactive is probably the main thing that [investors] need to be. Hopefully, no more big economic shocks are coming but, when shocks do land, be nimble, change your plans and talk to your lenders and brokers—that’s always going to be good advice. As the market becomes more defined, we’re starting to see lenders fall into certain specialisms and getting better at providing different sorts of products. We can see the same thing for brokerages as they grow, becoming a better source of information and advice.

DN: I think this is a fantastic opportunity for brokers to show off their expertise and help these clients; now is the time that people really do need some help and an expert to talk to.

AD: Emma, as a broker, how hard is it for you to keep up with all these changes and offer quality advice that helps clients?

EM: It’s really hard, especially with everything changing all the time. Keeping up with laws and product changes is difficult, so I try to read as much on this as I can to gain extra knowledge. At the same time, you must be wary as there are so many things that we can’t advise on—for example, tax. You don’t want to get caught out giving wrong advice, so it’s all about helping [clients] along and giving them a hand, but also protecting ourselves.

AD: Do you think that this current situation has highlighted the value of open and honest communication between all parties?

ER: Yes, definitely. I always tell clients from the start to tell me everything they possibly can, otherwise there’s not much point in doing [anything], as it wastes both our time and their money. It’s just better to be upfront with everybody.

AD: In your opinion, how do you expect the commercial property market to evolve over the next few years?

DN: It’s very difficult to look five years into the future, particularly after we’ve all been shocked so many times over the past two years—but I think there will be a few structural shifts. In retail, I would expect there to be a swing towards urban living across the high street with more retail premises being converted into flats, and we’ll see a combination of residential and traditional retail spaces. This trend will probably accelerate and continue. In the office sector, I’d expect there to be more focus on meeting and collaboration spaces and possibly less focus on desks as businesses look to adapt to what hybrid working means—so I think the shape of offices will change a bit. London will probably be a particularly strong area for this, because it’s a really good central meeting point, but also other major cities such as Manchester and Birmingham. For industrial, I think there’s a bubble that has burst but, structurally, the rise of e-commerce and the development of logistics will continue, so I think it will be a strong sector for the foreseeable future.

I

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