Commercial finance

The rise of conversions

Conversion of structures from commercial to residential use has become increasingly popular, according to Colin Sanders, chief executive at Tuscan Capital.

As people left cities in search of more space and during COVID, many buildings stood unoccupied as their use as office blocks was rendered redundant. In order to encourage conversions, the government introduced new rules facilitating the conversion of commercial premises in England into homes. The changes meant that full planning applications were not required, and homes instead were delivered through a prior approval process.

From April 21, 2021, unused commercial buildings were granted permitted development to be converted into homes via a fast-track prior approval. In addition, a fast track for extending public buildings, such as schools, colleges, and hospitals, was introduced.

As part of the new rules, councils were only able to turn down applications on limited grounds, including flooding risk, noise pollution, and inadequate natural light.

“We saw a lot of this type of activity in 2021; it was definitely a trend that formed during the second year of the pandemic,” Sanders said.

Sanders went on to say that clients were assessing the performance of their assets and they were looking to use Tuscan Capital’s change-of-use product to convert those that were vacant or not providing a decent yield.

“In the majority of cases they received a favourable opinion from their local planning authority and were able to make the transition,” he added.

Sanders believes that the turnaround in fortunes for the investor could be quite substantial, as he said many commercial buildings have high residential potential.

“I know of a failing shop that had a deep footprint – the premises went quite far back, which was not necessarily that beneficial, while it had four flats above it,” said Sanders.

He explained that the commercial landlord was able to halve the shopping space and alter the residential configuration.

“They were left with a much greater residential area and a smaller but betterpresented shop, which provided a better return on half the retail space,” he added.

This type of activity has been seen across the country - for example, BLEND Network funded a town centre rehabilitation project, in order to turn a redundant office block in Great Yarmouth into 30 residential flats at the back end of last year. The conversion has helped retired people as well as those taking advantage of the government’s Help to Buy scheme.

Prices for the two-bedroom flats, which are listed on Rightmove, range from £135,000 to £180,000, with the one-bedroom homes selling for £95,000 to £110,000.

Morgan Bowker, head of bridging and development finance at Vincent Burch Mortgage Services, explained that prepandemic, the retail sector was always in the headlines.

“Independent retailers, alongside big-name brands, were struggling to compete with online giants such as Amazon,” she said.

Amazon was able to outperform its highstreet counterparts on almost every level during the pandemic. The rise in the number of online orders helped Amazon achieve record sales, and it then spent large amounts on coronavirusrelated investments – like safety gear for workers and its internal testing initiative, called Project Ultraviolet.

Bowker believes that COVID-19 exacerbated the divide between Amazon and retail shops, meaning many were forced to cut costs, often by closing shops in what were once bustling high streets.

However, she noted that while this situation left many of the high streets empty, it did present an opportunity to convert these unused commercial buildings into residential properties.

“Following these changes, we have seen a number of our established clients take advantage and enquiries have been increasing from other investors looking for a bite of the cherry,” she concluded. 

What is coming up for specialist property finance

Adam Tyler

Executive chairman, FIBA

Last month we got to enjoy the success of an annual conference again. It was always going to take a few weeks to begin to contemplate and plan for the rest of the year.

So what can we anticipate for the remainder of 2022? There have been some record numbers delivered over the last two years by the specialist and commercial finance community. This refers not only to enquiry levels, but to completions in all aspects of commercial lending and structured finance from a widening variety of lenders and funders. There have been some new additions to the community, as well as some we have lost and others that have restructured, but the capacity is there and looking to grow.

But what can we really expect from the specialist commercial finance market and its supporters for the remainder of the year? In support of this, what can we add to enhance the abilities of all involved in the funding process, from introduction to drawing down the funds? There is always a need for greater awareness and knowledge through education, and also a need for better access to the widest possible lender community, which we can now combine with the absolute imperative to network together as an industry.

FIBA has been leading the charge on the education programme for the specialist property finance industry, and this now has its own momentum. The London Institute of Banking and Finance, with its university status, is in the process of setting the modules and topics to cover initially the specialist property finance syllabus agreed by a panel of industry experts.

Whilst we have no indications that the regulator is interested, it is hugely important that we do everything we can to ensure those operating in our space are doing so correctly. This leads very easily into something quite specific, and this is the FIBA and SimplyBiz Specialist Property Finance Club (SPFC) and the launch of the next phase, with another nine lenders added to the panel.

The interest in specialist property finance has been one of the main drivers in the association’s membership growing by a further 50 per cent in 2021, on top of having doubled the previous year. Following our initial launch of the SPFC last year, we have had a lot of activity and interest from all of our broker members, with a number of our lender partners also wanting to join.

We are seeing more and more of our members look at these markets as they extend their proposition to their clients. The work that the FIBA and SimplyBiz Mortgages teams have been conducting means that more firms are now seeing the benefits of bridging, development finance, and commercial mortgages. The opportunities are out there, the lender community is well funded, and there is confidence from the funding investor base.

There is confidence in what we can achieve as we go through the rest of this year and into 2023, so I am pleased to announce the launch of the Specialist Property Finance Summit in London on 13 October. At that time, we will have brought all of the plans, our commitments, and the programmes together for the benefit of everyone involved in helping our customers fund their commercial property aspirations.

While there is an abundance of opportunity in specialist property finance, it requires knowledge, innovation, and perseverance on the part of brokers and lenders to shape the right deal for the right project on the right property for the customer. But this is how our industry has adapted and grown over the last 20 years, and it will continue to do so in the future. 

Hodge – expansion of the bank’s commercial lending proposition

Kevin Beevers

Commercial lending director, Hodge Bank

If the past two years have taught us anything, it’s that we have to adapt and change if we want to thrive. Hodge has been in the commercial and residential investment and development markets for more than 30 years and seen a lot of change in that time. Kevin Beevers, managing director of commercial lending at Hodge, explains how the past few years have really tested the mettle of both property finance and investors alike.

It’s fair to say we’ve been tightly focused on pure residential development during the past two years. However, the impact of COVID on the commercial property market and a realisation of the growing appetite for mixed-use and residential assets have caused us to rethink our target market and review our product offering.

We’ve recently made changes to our residential development loans to incorporate lending on alternative residential asset classes, including student accommodation and retirement living, and we also provide the option to convert both residential and commercial development facilities into longer-term investment finance for those clients who wish to retain their assets once development is complete. In addition, we recently launched a new stretch senior finance option to provide experienced property developers with the opportunity to access additional development leverage alongside a Hodge senior development facility.

On the commercial investment side, we launched a brand-new product in April aimed at experienced property investors who favour buying a mix of commercial buildings. Our new commercial investment finance product is for those investors looking to buy real estate assets such as office buildings, industrial, retail, leisure, and mixed-use buildings.

We believe our new products and changes in criteria show the market that we mean business – that our doors are open to intermediaries and brokers, as well as their clients, who are really looking to shift their property focus. We understand the market is in a state of flux and want to help those trying to stabilise it.

WE HAVE A PROVEN TRACK RECORD OF A RELATIONSHIP-BASED APPROACH

Hodge prides itself on taking a very human approach to commercial lending. Each client has direct access to a dedicated, experienced relationship manager, and each application is personally reviewed and assessed by a specific underwriter who evaluates its merits and risk.

That relationship and our one-to-one method really help to get the best out of the finance product for the investor and are especially suited to active investors who regularly buy, refinance, modify, or sell property, as those types of investors require a close relationship with their funder. We think this is even more important at this time of record-high property prices as well as the diversification of many investors’ portfolios.

Personally, I hope the changes will continue to meet the growing and evolving needs of existing clients as well as provide opportunities for new clients. Having worked in this industry for nearly two decades, I know that there’s been a definite shift in the appetites of both developers and property investors over the past few years to more diverse developments and portfolios.

We’ve been working closely with our intermediary partners on what their clients want and need, and believe we’ve come up with some great changes and new products. Find out more about Hodge’s commercial offering at www.hodgebank.co.uk/commercial or contact the team at Investmentfinance@ hodge.co.uk. 

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Hodge is a trading name of Julian Hodge Bank Limited which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority under registration number 204439. Hodge Life Assurance Company Limited is authorised and regulated by the Financial Conduct Authority under registration number 139315. Registered office for both in England & Wales is One Central Square, Cardiff, CF10 1FS (No.743437)