In the future, some landlords may have to tighten up their financial management in some sectors of the commercial property market because rents will remain below pre-pandemic levels in some subsectors.
Rents reduced by the pandemic have been the most damaging to landlords with retail and office properties. Many landlords have struggled to make their mortgage payments due to tenants not being able to pay and the temporary ban on evictions that ends in March 2022.
There is strong demand for commercial property elsewhere in the market. Since workers are migrating back to the office, flexible office space rents have recovered well, and warehouse and logistics space rents are up as e-commerce activity increases.
It is expected that inflationary pressures on interest rates will increase landlords’ costs further in 2022. There is a possibility that covenants could be breached if landlords can’t pass these increases on to tenants, and lenders may decide to call in loans.
Landlords of commercial properties should carefully review their financial arrangements to avoid getting into trouble. It is advisable to secure fixed-interest mortgages as soon as possible if they are due for renewal. Tax relief may gradually diminish over time for those with capital repayment mortgages, which can have an adverse effect on cash flow.
Landlords can also use financial risk management software for managing and getting analysis of risk factors.
It is also possible that some landlords could feel the pinch because of upcoming tax changes. In April 2023, corporate tax rates are set to change, which could result in companies paying 25% in corporate taxes on profits over £250,000 per year. Tax rates between 19% and 25% should be expected for those with profits between £50,000 and £250,000 per year.
Furthermore, some tax reliefs are being reduced. In 2022, the Annual Investment Allowance (AIA) will be reduced from £1 million to £200,000 for spending on additions to commercial properties.
The terms and conditions of landlords’ commercial insurance policies should also be examined by landlords who have incurred significant losses due to non-payment of rent. Due to a temporary ban on evictions, businesses may be able to claim losses caused by business interruption.
Commercial property landlords are always advised to maintain close financial control, but they should not ignore opportunities to repurpose their portfolios. Build-to-rent opportunities are particularly popular with investors, raising the possibility they might be sitting on a valuable asset.
For more information on the above, you can contact industry expert Rebecca Wilkinson here at https://www.menzies.co.uk/people/rebecca-wilkinson/
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