The Intermediary – January 2026 - Flipbook - Page 55
SPECIALIST FINANCE
Opinion
Floorspace:
When size decides the rate
TOM WORBEY
is senior product manager
(lending) at Redwood Bank
Lenders who operate via floorspace
will oen qualify an asset as semicommercial if more than 50% of
the floorspace is residential. This
is particularly useful for welllocated mixed-use assets with strong
commercial tenancies but larger
residential spaces that typically have
lower yields.
Illustrative example:
landlords have spoed opportunities
to repurpose or convert parts of these
properties to meet new market needs,
such as flexible workspaces, houses
in multiple occupation (HMOs) or
additional flats. This adaptability adds
long-term growth potential.
The changing face of UK high
streets has created a supply of
competitively priced mixed-use
properties. Declining demand for
some retail spaces means landlords
can acquire assets at aractive
valuations, oen below the cost of
comparable residential properties.
For investors seeking value and
flexibility, this represents a significant
opportunity.
Why this trend matters
Mixed-use properties are becoming a
key part of many landlords’ strategies,
but for brokers, the opportunity
comes with complexity. It’s not just
about knowing why these assets are
aractive, it’s about understanding
how lenders decide whether a
property qualifies for residential or
commercial interest rates.
This decision can significantly
impact affordability and the client’s
return on investment. Some lenders
will treat a mixed-use property as
semi-commercial or residential if
certain criteria are met, while others
will apply full commercial pricing.
The challenge? Each lender uses a
different yardstick.
Broadly, lenders assess eligibility
using one of three methods:
Floorspace ratios
Capital value split
Rental income distribution
Here’s what each approach means
in practice and why it maers when
placing a deal.
A city-centre property with a retail
shop on the ground floor and flats
above. Even if the shop earns more
rent, the flats take up more space,
so the lender treats the property as
“mostly residential”. This approach
focuses on physical use, not income.
Capital value:
Looking at what’s worth more
Some lenders focus on the value split.
If the residential element represents
most of the property’s total value, the
lender may offer semi-commercial
rates, even if the commercial unit
earns more rent.
Brokers should confirm with the
lender whether they plan to use
Vacant Possession valuation of the
commercial unit(s) or a Market Value
valuation reflective of the lease of the
property.
The difference is significant: the
former, while reducing the value
of the commercial element, may
allow a client to qualify for a semicommercial product with more
favourable pricing or affordability
treatment, whereas having a value
reflective of the lease value of the
property could potentially increase the
capital value weighting of the property
to commercial, resulting in higher
rates and affordability assessment.
Illustrative example:
Imagine a property in central London
with a ground-floor retail unit and
three flats above:
Vacant Possession approach: The
valuer treats the property as one
mixed-use asset. Total valuation
might come in at £2.3m, with
£1.3m of the value coming from the
residential value.
Market Value approach: The
valuer may reflect the value of the
commercial lease, resulting in the
total value of the property being
£2.7m, with £1.4m coming from the
commercial value.
It’s important to consider that while
there is a £400,000 difference in value,
and potential for a larger loan amount
available from using the Market
Value approach, there are additional
ramifications, including whether
the lender applies residential-style
pricing, or if a higher LTV results in a
further price increase. This is why it
is important for brokers to clarify the
valuation method upfront.
Rental income:
Following the money
Lenders may base decisions on income
split. If the residential part generates
most of the rent, that’s a win for
residential treatment, even if it’s
smaller in size.
Illustrative example:
A property has 40% residential
floorspace but earns 55% of its income
from the flats upstairs. This oen
happens with smaller mixed-use
properties or those with HMOs above
a shop. Here, the lender focuses on
current income, not size or value.
In conclusion
Mixed-use properties offer compelling
advantages for landlords, from
tax efficiency and higher yields to
diversified income streams and longterm flexibility. But when it comes
to finance, the same property can be
viewed very differently depending on
the lender.
Floorspace, capital value and
rental income each tell a different
story, and each can lead to a different
pricing and affordability outcome. For
brokers, understanding which metric
a lender prioritises is critical. It can
be the difference between securing
residential-style pricing and falling
into a full commercial assessment.
As mixed-use becomes a more
prominent part of landlord strategies,
brokers who understand lender
criteria and valuation approaches
will be beer placed to structure deals
effectively, manage client expectations
and deliver stronger outcomes in an
increasingly complex market. ●
January 2026 | The Intermediary
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