In the last stages of 2021, some subsectors of the commercial property market were still seeing low rental income compared to pre-pandemic levels. With the cost of mortgage repayments expected to rise soon as a result of inflationary increases in interest rates, landlords now need to consider tightening up their financial management.
Impact of Covid
During the pandemic, landlords with large office buildings and high street retail property have been hit hard, incurring significant losses as a result of reduced rents. The introduction of a temporary ban on evictions protecting tenants who were unable to pay has caused some landlords to struggle to meet their mortgage repayments.
On the other hand, there are areas in the commercial property market that have bounced back. Demand for flexible office space has soared as a new normal of hybrid working has evolved. The digital shift online in increased e-commerce activity has also increased the demand for warehouse and logistics space, with rent rates reflecting this.
Looking ahead to 2022, inflationary pressure on interest rates is expected to increase costs further for landlords in the sector. If they do not succeed in passing these increases on to their tenants, it is possible that covenants could be breached and lenders could decide to call in loans.
Factors to consider
It is important for commercial property landlords to It is important for commercial property landlords to carefully review their financial arrangements, to avoid getting into difficulties. For example, where fixed interest mortgages are coming up for renewal, landlords should look to fix new rates as soon as possible. For anyone with capital repayment mortgages, it is important to remember that tax relief on the repayments will decrease over time as an increasing proportion of the repayment relates to loan capital which is not tax deductible instead of interest which attracts tax relief. Landlords should plan for the gradual reduction in tax relief that will apply over time and factor this into cashflow planning.
Upcoming tax changes
There are currently some tax changes in the pipeline which could also leave landlords stretched financially. For example, from April 2023 there are planned changes to the corporate tax rate and landlords could see their corporate tax liability increase from 19 per cent to 25 per cent on profits that exceed £250,00 per annum. Those who have profits between the range of £50,000 -250,000 per annum should be prepared to pay between 19 and 25 per cent tax. In addition to this, there are certain tax reliefs that are being reduced. For example, the Annual Investment Allowance (AIA) will fall from £1 million to £200,00 from 1st January 2022, meaning landlords could receive lower tax relief on capital expenditure on renovating or improving commercial properties.
How to treat losses
Landlords that have been impacted and accumulated significant losses due to the non-payment of rent need to examine the terms and conditions of their commercial insurance policies. In some cases, it may be possible to bring a claim for losses incurred as a result of business interruption, due to the temporary ban on evictions.
Although close financial management is always important, commercial property landlords shouldn’t lose sight of available opportunities that may exist to re-purpose their portfolios, perhaps for residential letting. Strong investor interest in build-to-rent opportunities in particular means they could be sitting on a valuable asset after all.