With rents still down on pre-pandemic levels in some subsectors of the commercial property market and the cost of mortgage repayments expected to rise next year due to inflationary increases in interest rates, some landlords may need to tighten up their financial management in the year ahead.
Landlords with high street retail property and large office buildings are among those most likely to have incurred significant losses during the pandemic, due to reduced rents. In some cases, tenants were unable to pay and the temporary ban on evictions, which ends in March 2022, has caused some landlords to struggle to meet their mortgage repayments.
Elsewhere in the commercial property market, demand is strong. For example, rents for flexible office space have recovered well, due to workers migrating back to the office, and demand for warehouse and logistics space has risen, due to increased ecommerce activity.
Looking ahead to 2022, inflationary pressure on interest rates is expected to increase costs further for landlords in the sector. If they are unable to pass on these increases to their tenants, it is possible that covenants could be breached and lenders could decide to call in loans.
To avoid getting into difficulties, commercial property landlords should review their financial arrangements carefully. If fixed interest mortgages are due for renewal, they should look to secure them as soon as possible. For those with capital repayment mortgages, it is important to factor in the gradual reduction in tax relief that will apply over time and the impact this could have on cashflow.
Tax changes in the pipeline could also leave some landlords feeling the pinch. For example, planned changes to the corporation tax regime, due to take effect in April 2023, could see their corporate tax liability rise to 25% on profits over £250,000 per annum. Even those with profits of between £50,000 and 250,000 per annum should expect to pay tax of between 19% and 25%. On top of this, certain tax reliefs are being reduced. For example, from 1 January 2022, the Annual Investment Allowance (AIA), which applies to spending on qualifying additions to commercial properties, will fall from £1m to £200,000.
Landlords that have accumulated significant losses due to the non-payment of rent should also examine the terms and conditions of their commercial insurance policies. In some instances, it may be possible to bring a claim for losses incurred as a result of business interruption, due to the temporary ban on evictions.
While close financial management is always important, commercial property landlords should not lose sight of opportunities that may exist to repurpose their portfolios. Strong investor interest in build-to-rent opportunities in particular means they could be sitting on a valuable asset after all.
Rebecca Wilkinson is a tax partner and property sector specialist at accountancy firm Menzies
UK real estate is in a precarious position, with chronic housing shortages and rising mortgages posing a significant challenge to the future development of residential and commercial properties. Homeowner confidence has declined dramatically, with 62% of Londoners dissatisfied with the state of the housing market since 2019.
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