How to finance a commercial property portfolio

Financing a commercial property portfolio in the UK involves careful strategic planning depending on the size of the portfolio, the type of properties, your financial situation and your investment goals.

Here’s a comprehensive guide on what finance options are available when funding a commercial property portfolio:

Portfolio Mortgages

A portfolio mortgage is one of the most common ways to finance a commercial property portfolio. These loans are secured against the value of the property.

With a commercial mortgage, investors can benefit from cross-collateralisation because multiple properties are grouped together under one loan. This reduces the need for individual financing but ties all the assets to one lender. In grouping them together, you can benefit from unlocking a significant portion of the property’s value via long repayment terms that can help to manage cash flow. However, as it is a type of mortgage product, portfolio mortgages often require a large deposit, are not regulated by the FCA and can be subject to higher interest rates when compared to residential mortgages.

Buy-to-Let Mortgages for Commercial Properties

For multiple Buy-to-Let or mixed-use properties (residential and commercial components in one property), you may be able to obtain a commercial buy-to-let mortgage. These are similar to residential buy-to-let mortgages, but are designed for properties being used for business purposes making them a good solution for portfolio or professional landlords.

Bridging Loans

Bridging loans are short-term, high-interest loans used to “bridge” the gap between purchasing a property and refinancing on to a long-term facility. They are attractive to investors because you can not only get approval quickly, but you can secure flexible finance for up to 75% of the property’s value and the term lengths are shorter, usually between 3 and 18 months per agreement.

It’s important to note that bridging loans are not a long-term solution for financing property. They are best used when investors need to purchase property quickly, perhaps at auction or during a chain break, and when the property is not in a rentable condition and needs refurbishment.

Development Finance

Development finance is ideal if you plan to develop or refurbish properties before selling or renting them out. Investors and developers can typically secure finance for up to 70% of the final gross development value (GVD) and terms are available up to 24 months. One significant advantage of development finance is that interest can often be rolled up, meaning no interest payments are required during the project phase.

However, as development loans can be sizeable, a higher degree of detailed cost planning and justification is required. Funding is usually provided or ‘drawn down’ in stages, and lenders may insist on a project manager throughout the duration of the project to ensure progress stays on track.

Joint Ventures (JVs)

A joint venture involves partnering with another investor or company to finance a property portfolio. There are two types of JVs to consider:

• Equity JV: Both parties contribute equity and share the profits and risks.
• Debt JV: One party provides the capital while the other manages the property and pays an agreed-upon return on the investment.

Both types provide access to additional capital and expertise, which some individuals may find beneficial, especially when starting out.

Private Equity and Venture Capital

For larger-scale and professionally managed property portfolios, private equity or venture capital firms may be a suitable option during expansion.

Private equity firms typically invest in a large cash injection into commercial real estate projects that offer high growth potential and good return on investment. In exchange, they may require a percentage of ownership or management control.

Applying for commercial property portfolio finance

Like any application for finance, it’s important for the request to be comprehensive and well-detailed so the lender can obtain a clear picture of what you are trying to achieve. At Wharf Financial, we have been securing commercial property finance for many years, and know what pitfalls to be aware of when applying.

• Deposit: Depending on the type of finance being applied for, you may need a deposit of up to 35% of the property value.

• Creditworthiness: Your personal or business credit history will be reviewed, and may impact the interest rates and loan term available to you.
• Property Valuations: Professional valuations will be required to determine loan amounts and terms. A lender will not be satisfied with an estimation.
• Rental Yield: Lenders will often assess the rental income to ensure that the property can cover loan repayments. It’s important to have a plan in place for what will happen in the event of a shortfall? Will you be able to top up with personal funds?
• Exit Strategy: Always have a clear plan for how you’ll repay loans, particularly with short-term options like bridging finance. Options include selling, or you may choose to refinance. There are plenty of long-term options available to manage repayment.
• Interest Rates: Commercial interest rates vary depending on the lender, your credit rating and the type of property. Fixed and variable rate options may be available, but instructing the use of an adviser will help to asses the most competitive options in the market. 

To finance a commercial property portfolio, there are a range of financing solutions available. The strategy you choose will depend upon your goals and financial situation. Diversifying your financing sources, understanding the terms and risks involved and leveraging professional advice from the team at Wharf Financial can help you manage and grow your portfolio effectively. Get in touch today to see how we can help.