A guide to investing in semi-commercial property

What’s the definition of semi-commercial?

Semi-commercial properties have an element of both retail space and living space. They are classed as semi-commercial if at least 50% of the property is residential. Typically this might comprise a shop on the ground floor with a residential flat above it, offering a range of opportunities for investors and landlords.

Why invest in semi-commercial property?

Semi-commercial properties are attractive to landlords looking to diversify their portfolios.  While they come with more complexity, investing in semi-commercial property brings an opportunity to earn higher rental yields, and to capitalise on dual revenue streams, with potential from both residential rental income and commercial revenue. There can be further long term potential to unlock too, as planning reforms over recent years have extended permitted development rights to convert or add residential units to some commercial properties.

Landlords are increasingly noticing the benefits: we have seen applications to Shawbrook almost double in 2024 compared to 2023. As the market becomes less volatile, investors are looking to expand their portfolios with higher yielding assets like semi-commercial properties. 

What to consider before investing in the semi-commercial space?

Understand semi-commercial mortgage rates

To increase the amount you can borrow, the residential unit of the property must have separate access. You will likely need to have a 25% deposit or higher as well as funds to cover fees and costs, such as stamp duty (“SDLT”). It’s worth checking what stamp duty would be due as commercial properties have their own SDLT regime.  Mortgages work in a very similar way to a buy-to-let mortgage in that the lender will look at both the value of the property and the income it generates. 

Lenders will look at the income from both the commercial and residential elements of the build when assessing mortgage offers. In many cases lenders will want to see a commercial lease in place when you apply, given it can be harder to source a commercial tenant than a residential one. 

Consider regulatory requirements

While commercial mortgages are not regulated, if you did intend to live in the residential element then the loan could be regulated which requires a lender comfortable with this intended use. Make sure you understand the nature of the mortgage you require and check lender criteria before applying. A specialist broker can be an ideal way to navigate the market for options based on your circumstances.

Do your due diligence on the area

With semi commercial properties it is essential that as an investor you do your due diligence on the area. Consider elements such as the footfall, how other commercial premises are faring, and how well established the business you are considering is.

We have noticed an increase in applications to Shawbrook for the South-East in particular; with two-fifths (39%) of investors looking at that region compared to 27% in 2023.