In the commercial market in the UK, there’s currently a dichotomous tension between the state of the commercial investment market and the commercial lending market. We are in a down-cycle in the commercial property market – prices are substantially down, and many vendors are motivated to sell. It’s a fantastic Window of Opportunity in the market if you are a purchaser, but many owners of commercial property may have very expensive debt and could be suffering from down valuations. Lending is expensive and loan to value ratios have reduced as commercial lenders have become more cautious in this part of the cycle.

However, this unique market presents a huge opportunity for savvy investors who understand the art of finance structuring and are prepared to adapt to lenders’
policy requirements.

1. Recognising the Opportunity
The commercial and semi-commercial property market is ripe with potential. Key to capitalising on this opportunity is grasping the nuances of financing structures and anticipating future lending policies. Investors need to be strategic, considering scenarios where assets might need to be financed and refinanced multiple times, either with the same lender or different ones. This is particularly relevant at present for properties such as commercial units with 1-4 tenants facing lease expiries, sites where owners are experiencing high stress due to current rates, or large sites with little demand from buyers.

2. Vacant Possession vs Market Value
Until recently, lenders would have been happy to finance commercial property based on ‘market value’ (MV). Market value is what a valuer thinks a property can be sold for in 12 months and with the benefit of the current tenant. This often reflects reality!

Vacant possession value is the value of a property assuming there is no tenant in place – it’s the inherent bricks and mortar value. In the current market, even if a commercial property is currently occupied by a commercial tenant, unless there is a lease over five years and the property is occupied by a brand, banks will often instruct their valuers to value on vacant possession value. Why? Because they recognize that we are in a down cycle, and they are trying to mitigate their risk.