The rise of semi-commercial property investments

The UK property market is in a state of transformation. While traditional commercial and residential investments remain prevalent, a new contender has steadily risen to prominence over the past years: semi-commercial properties. Combining residential and commercial elements within a single development, these hybrids bridge the gap between two sectors and offer opportunities for both diversification and profitability.

For commercial property investors seeking resilience and balance amidst market fluctuations, semi-commercial investments could represent a viable and lucrative venture. However, beneath the appeal lies a complicated web of regulations, legal frameworks, and practicalities that require careful consideration.

Why are semi-commercial properties gaining traction?

Semi-commercial properties, often referred to as mixed-use properties, seamlessly combine a commercial unit with residential accommodation. Examples can include a high-street shop with flats above or a ground-floor café with living spaces on upper levels.

Their growing popularity can largely be attributed to their dual-income potential and ability to hedge risks. For investors, rental income from the residential portion offers steady cash flow, even if the commercial element experiences vacancies. Such diversification is particularly appealing amidst economic uncertainty, and the notion of “hedging against risks” resonates strongly with methodical investors.

According to recent data, applications for semi-commercial mortgages surged from 13% in 2023 to 24% in 2024. Regions such as the South East, specifically cities like Southampton, are proving to be hotspots, with the area offering buy-to-let rental yields as high as 6.42%. These figures highlight an undeniable market shift, as more investors are drawn to the long-term benefits of mixed-use properties.

The strategic advantages of semi-commercial investments

One of the standout advantages of semi-commercial properties is their ability to offer a reliable financial buffer. For example, should the commercial space remain vacant for a period, rental income from the residential units can help maintain operational cash flow. This dual-stream income model offers peace of mind, making mixed-use assets a more resilient investment choice compared to standalone commercial buildings. We are also seeing the space being allocated to provide income for different generations. So perhaps the commercial space being allocated for parental income whilst the residential space being allocated for future generations.

Investors can also unlock further potential in semi-commercial properties through value-add strategies. For instance, underutilised commercial spaces can often be converted into residential units, subject to obtaining the appropriate planning permission. This adaptability can significantly boost both rental yields and overall property value.

From a taxation perspective, semi-commercial properties present significant advantages. Notably, mixed-use properties are exempt from the 3% Stamp Duty Land Tax (SDLT) surcharge that applies to additional residential properties, making them a cost-efficient choice for investors. Moreover, SDLT is calculated differently for mixed-use assets, often resulting in lower rates compared to strictly residential properties. Business Rates typically apply only to the commercial portion, leaving the residential element exempt. For tax-savvy investors, these efficiencies can translate into substantial savings and enhanced profitability.

Understanding the legal landscape

While the appeal of semi-commercial investments may seem straightforward, they come with nuanced legal and regulatory complexities that investors must address to ensure compliance and profitability. An understanding of these unique challenges will allow for a confident and secure investment.

1. Planning permissions and use classes

One of the critical considerations with semi-commercial properties is ensuring compliance with planning laws and use classifications. The advent of Class E in the Use Classes Order reform has introduced greater flexibility for commercial properties, but this does not negate the need for careful planning. Particular attention must be paid if an investor seeks to alter the balance between commercial and residential use. A change-of-use application may be necessary, and failing to address this requirement could lead to complications from both regulatory and tenant management standpoints.

2. Lease agreements and managing tenants

The dual nature of these properties also means navigating two distinct tenant frameworks. Commercial and residential tenants are governed by separate legal framework, requiring airtight lease agreements tailored to the specific rights and obligations tied to each tenant. For example, residential leases are often governed by the Housing Act 1988, whereas commercial leases may fall under the Landlord and Tenant Act 1954. Complications can arise if clarity around responsibility for maintenance, repairs, or utilities is lacking, resulting in disputes that could disrupt cash flow. Working out at the outset how the building is to be maintained is key.

3. Financing challenges

Securing finance for semi-commercial properties can be more intricate compared to traditional investments. Lenders often assess such transactions with a degree of caution, requiring detailed financial disclosures and evidence of diversified income potential. Semi-commercial mortgages may feature terms distinct from residential or commercial loans, often including shorter repayment periods, higher interest rates, or Loan-to-Value (LTV) requirements. An in-depth understanding of the financial structures involved is paramount to align financing with long-term investment goals.

4. Taxation and compliance

The bifurcated nature of semi-commercial properties creates unique tax implications. Investors must account for SDLT, Capital Gains Tax (CGT), and potential VAT for the commercial portion, all of which could vary based on how the property is utilised. The HMRC offers specific guidance for mixed-use claims, and strategic tax planning can maximise returns while remaining compliant. Collaborating with financial advisors and commercial property solicitors can help mitigate tax inefficiencies while structuring investments appropriately.

The future of semi-commercial properties

The rise in semi-commercial properties demonstrates a dynamic shift in the UK property market, reflecting modern investors’ appetite for diversification and resilience. With increasing demand for rental properties in urban areas and the flexibility to adapt spaces for future use, the potential for capital and rental growth remains strong. For those who approach such investments with caution, strategy, and the right team of advisors, semi-commercial properties offer a lucrative and future-proof opportunity.

Investing in semi-commercial properties demands a multidisciplinary approach to ensure every legal, financial, and operational aspect is addressed. With decades of expertise in commercial property law, the team at Newmanor Law is dedicated to simplifying this complex process for our clients.

We understand that every investment comes with its own unique challenges. Whether it is navigating planning consents, drafting and managing lease agreements, or securing the right financial structures, our bespoke guidance ensures clarity, compliance, and confidence at every step of the transaction.

Whether you’re taking your first steps into semi-commercial property or expanding an established portfolio, we are here to guide you through this evolving landscape with unmatched expertise.