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IS NOW A GOOD TIME TO INVEST IN COMMERCIAL PROPERTY?

With the changes to the buy to let property market over the last 2-3 years, more and more landlords are turning their attention to commercial property. In this guide, I will break down why this is happening, how commercial mortgages work and the key points to consider before investing.

 

Why commercial property is such a popular investment

Commercial property can be an excellent investment as they tend to provide much stronger yields than residential buy to lets. In addition to the strong yields, they tend to be backed by long-term leases, often between 5-20 years, which in theory provides watertight income for a defined period.

These factors combined, plus the fact that there are often provisions in leases for rents to increase in line with inflation each year can make them an appealing option.

Some leases are ‘fully repairing and insuring’. This means that the tenant takes on the legal responsibility for both insuring the property and undertaking any repairs, including general wear and tear. This means that you’ll be receiving the property back in the same condition as when the lease was signed. This is a major benefit compared to residential investments, where you are responsible for both repairs and insurance of the property.

 

Picking up a bargain property

Vacant commercial properties are often much cheaper than those with solid leases in place. This means you can pick up vacant properties and increase the value quickly by finding a strong tenant who is happy to sign a long lease.

Where this approach is employed successfully, you can often refinance to release some of the uplift, allowing you to invest in further property. This strategy works especially well when you can fund the initial purchase in cash or using a bridging loan.

There does need to be an element of caution employed, however, as while the property sits vacant, you are liable for the business rates. Should it take longer than expected to find a tenant, this can add up to a significant amount.

 

How has pandemic has affected the commercial property market

The impact has certainly been felt throughout the market; however, some sectors have been affected far more heavily than others. For example, essential retail properties, such as local shops are a very strong investment and many retailers have had a strong 2020.

The flipside to this is pubs and other leisure properties. These businesses have often been forced to close at very short notice, which ultimately creates a threat of loss of rent, or even completely losing your tenant. This has created a lot of uncertainty in certain sectors and you may even struggle to secure finance if your tenant is in an industry which is considered high risk.

When looking at potential investments, you must consider how the pandemic has affected that industry, as this could have a significant short-term impact. In addition, you should also consider the long-term viability of that type of business, plus the other types of businesses who may wish to let the property if your tenant were to leave.

 

The finance options available

These property investments are usually funded using commercial investment mortgages. Commercial mortgages allow you to borrow up to 75% of the purchase price of the property, or the value for remortgages.

They work in much the same way as residential mortgages, with a lump sum being released upfront and monthly payments made to repay the loan. Some lenders will allow you to borrow on an interest-only basis, this is a popular way of improving cash flow by reducing your monthly costs.

 

The drawbacks of commercial property investment

Although the market can be a great one to invest in, as with every investment, there are some drawbacks. The main ones are the following:

  1. The commercial property market is less liquid than the residential market. This means that it can be tricky to secure the right price should you wish to dispose of the asset quickly. This means that commercial property investment is generally a longer-term strategy.
  2. The difficulties facing business owners due to the pandemic are ultimately the problem of their landlords. If your tenant falls into financial difficulty, the issue is likely to affect your rental income.
  3. Should you lose your tenants, or if the lease expires you will be liable for business rates of the property. This can be a strain on cash flow if you have a mortgage outstanding on the property, which will still need to be paid.
  4. It can take longer to find tenants for vacant properties, depending on the property and its location.

 

The main considerations before moving forward

The key to success is to fully understand the market before progressing. When looking to invest in commercial property for the first time, it’s wise to surround yourself with experts. You’ll need a good agent with local knowledge, an experienced commercial mortgage broker and a solicitor who is well versed in commercial property.

By working closely with experts, you’ll be able to avoid a lot of the common mistakes, while also learn a lot from them in a short space of time.

 

Finance

WHAT’S NEXT? PAYMENT TRENDS IN 2021

Philip McHugh, CEO at Paysafe

 

Undoubtedly COVID-19 is going to continue having an impact on us all at least for the next few months and maybe all of this year, but there are still reasons to be optimistic. The industry continues to evolve quickly, and that in mind, here’s five of our predictions to watch out for in payments in 2021:

 

1. New consumers to online change the digital payments landscape

As more consumers headed online during the first wave of COVID-19, businesses noticed that their customers were also paying differently. Three quarters (76%) of the businesses we recently asked for our Lost in Transaction research report series said that consumers were using different payment methods during the pandemic, with the increased use of digital wallets being the most common. Having more customers that were new to eCommerce, and customers now shopping regularly with businesses that they were not comfortable sharing their financial details with, were key reasons for this.

Consumers confirmed this was true. When we asked in April, 18% of consumers told us they shopped online for the first time during the pandemic. With 38% of consumers telling us they are planning to shop online more even when COVID-19 is no longer a factor in their lives, we should see this shift to alternative payments continue.

 

2. SCA will drive mass adoption of biometric authentication 

Perhaps the first factor to shake up the payments industry in 2021 is going to have the greatest impact of any trend we will see in the coming year. That is because, after a series of extensions, the deadline for PSD2 Strong Customer Authentication is fast approaching. From December 31 2020 any transaction that isn’t verified by multi-factor authentication will be automatically declined.

One of the inevitable consequences of this is going to be a huge increase in the use of biometrics to verify payments. With the growth of mCommerce that we have seen before and during COVID-19, it seems very likely this will accelerate beyond predictions made at the initial SCA deadline in 2019. Juniper Research has already predicted that biometrics will be used for more than 18 billion transactions in 2021, with a value exceeding $210 billion in 2021.

 

3. A renewed focus on 5G

The importance of 5G and the growth of the IOT was another prediction we made for 2020. But while the impact of the pandemic has been to accelerate many of the trends we expected to see, perhaps one area where the pandemic has actually slowed adoption is the growth of 5G. With consumers spending so much time at home, appetite for personal 5G-enabled devices has been limited.

But at the same time, the need for the in-store shopping experience to be as frictionless as possible is now more important than ever. Almost half (46%) of businesses told us that they had lost sales in 2020 because their checkout times were too slow. So the use of 5G technology to overhaul the checkout will be back at the top of retailers’ agendas.

Almost half (47%) of stores told us that 5G will mean the end of the traditional checkout, and more than half (53%) believe that Amazon-Go style frictionless checkouts are the future of retail. Omnichannel experiences where consumers shop in a store and then pay via a digital checkout on a smartphone app are also on businesses’ radars.

 

4. A surge in subscription models

Almost one fifth (18%) of stores told us that they had launched a subscription services during the pandemic, and this is not only a result of business need but also customer demand. Overall, 27% of consumers told us that they were already planning to increase the number of subscriptions they had in the future, and this rose to 37% for consumers aged 18-34.

The growth will not be limited to digital either. Pret A Manger recently launched the first in-store coffee subscription service in the UK, and we expect to see similar models populating malls and independent stores soon.

Also, only the initial purchase of a subscription is subject to PSD2 multi-factor authentication. So for some businesses, launching a subscription service may be a way to reduce friction in the online checkout.

 

5. AI and machine learning as the cornerstone of fraud prevention

We’ve known about the importance of artificial intelligence (AI) and machine learning to financial services for years, but in many cases the industry has been slow to implement the technology. With the sophistication of financial crime increasing, and the growing concerns of consumers of being a victim of fraud, it is no surprise that adoption is now accelerating rapidly.

Banks have currently spent as much as $217bn on AI applications already, and in 2021 AI and machine learning based systems will be the standard in fraud prevention.

 

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Finance

FIVE TRENDS THAT WILL IMPACT THE FINANCIAL SERVICES INDUSTRY IN 2021

Ian Johnson, Managing Director Europe at Marqeta

 

Coronavirus has shaken things up across all industries, and financial services is no different. This year, we are likely to see a much more risk averse industry, as fintechs and banks alike move into survival mode. Yet, this will also spur innovation. The shift away from cash will give a shot in the arm to digital payments, while lenders in particular will have to get creative to balance their risk against the need to dispense funds.

It’s likely to be an interesting, albeit bumpy, year. Here are five core trends that I see having a major impact in 2021.

 

Lenders will seek improved visibility to combat delinquency

An economic downturn unfortunately means higher delinquency rates for lenders. But businesses – in particular, SMEs – need liquidity to survive, now more than ever. To balance risk with need, more lenders will focus on enabling visibility and control after a loan is dispensed. Instead of issuing funds to a bank account, loans will be dispensed to virtual cards or wallets, allowing lenders to track exactly how and where money is spent. This way, lenders only release funds as they are needed – rather than in one lump sum.

Ian Johnson

They also have the power to approve or reject payments in real-time, based on whether the request is aligned with the terms of the loan agreement. For instance, if a company has secured a loan for IT equipment, but attempts to spend it on office refreshments, the lender can make an instant decision to permit or deny the transaction based on geolocation and other transactional data. So, borrowers should ready themselves to be much more transparent if they want to secure loans in the future.

 

Embedded payments to become more commonplace

Embedded payments has been around a long time – just look at pioneers like Uber, where payments are so integral to the customer experience that it doesn’t even feel like you’re paying anymore. In the next year, we will see this expand, with a wider variety of organisations making payments a core element of their customer experience strategies. This trend will be coupled with a shift towards transparency and privacy, where people willingly exchange their data for an improved, personalised experience.

This is something consumers do readily in many areas of online life already – shopping, social media, and so on. In 2021, we will see more banking and payment services operating off the back of this same exchange. In return for data, customers will be given smoother, more tailored payment experiences.

 

Use of cash to drop below 15%, falling from 23% of all payments in 2019

The UK and Europe’s departure from cash will continue to evolve into next year. Physical cards will begin to give way to a rise in digital payment methods – virtual cards, digital wallets, and the likes of Apple Pay and Google Pay. Banks will need to prepare for this shift; hopefully learning their lesson from the early months of the pandemic, where 88% were overwhelmed by demand for online and mobile banking. This means modernising behind the scenes, using technology to improve and streamline payment processing. Time and money also need to be invested into educating and supporting businesses and individuals that going cashless could leave vulnerable, such as small merchants and elderly people. Until this has been addressed, going cashless risks leaving the most vulnerable in our society behind.

 

Back-end bank modernisation set to continue

Traditional banks recognise that they need to be able to innovate faster, particularly on the front-end, to compete with the new waves of digital banks and fintech entering the market. While we will see continued modernisation on the back-end, as they try to unpick the complex web of legacy systems they sit upon, I would not expect this issue to be fixed in a year. Instead of taking on the risk of full migration, many banks will ‘hollow out’ certain services – leaving core services in place that are too risky to move, whilst shifting newer services onto more modern platforms to avoid coding them into legacy systems.

This will create the building blocks to build a standalone digital bank within a bank, allowing them to modernise the entire stack and then incentivising customers to make the switch. An example of this approach is Goldman Sachs’ digital bank Marcus, which has debuted to strong demand – it’ll be interesting to see if others follow suit.

 

Alternative lenders will open up the market to support post-COVID-19 recovery

The process of securing a loan has always been quite painful – involving lots of self-reporting, paper statements and credit reports. And it could take days to find out if you were successful and then even longer to access the funds. Thankfully, it is looking like those days might be coming to an end with the emergence of a new breed of alternative lender focused on transforming specific niches of lending. Take SME lending, which has traditionally been regarded as high risk/low rewards and neglected by traditional lenders.

New alternative lenders, such as Capital on Tap, are changing the stakes. Using data and modern payment platforms, they are able to make loan decisions in minutes, not months. We are seeing the same in Point of Sale lending with companies like Klarna – now, you can apply for a POS loan and get approved in seconds. These companies will set the standard in terms of expectations around lending, forcing bigger lenders to follow suit and helping to transform the loan experience.

 

Fintechs to continue leading front-end innovation

Fintechs hold the monopoly on defining what ‘good’ looks like in terms of features. From money management tools, to saving incentives, fintechs have the agility to create new, attractive products with a speed and creativity that traditional banks simply cannot match. However, true success stories of fintechs paving the way to long term profitability are rare. Established, traditional banks still hold all the capital and most of the main checking accounts, making it harder for fintechs to really get ahead. This is likely to continue into 2021, but we are seeing signs of convergence, with fintechs acting as the front-end for customers while banks provide capital in the background.

 

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