What’s happening in the commercial lending market?
REIQ Commercial and Industrial Chapter Chair Jason Luckhardt recently spoke with Andrew Stone from Astute Financial to discuss developments in the commercial lending market.
Reflecting on the last two years through the pandemic how would you describe the commercial lenders approach to the market?
After an initial period of caution, characterised by payment deferral arrangements being put in place and lenders focused on portfolio management, many businesses investment decisions were placed on hold in a ‘watch and see’ approach. Assisted by government stimulus, historically low interest rates, a clearer sense of which industries were impacted plus innovative thinking from some business owners to ‘pivot’, confidence started to return to the market.
Worst case scenarios had not eventuated with loan default measures generally well managed, the banks were capital rich and faced with the challenge of increasing lending in a responsibly managed way but also providing a point of difference to their prospective clients. This has resulted in some innovation in their approach but it has also seen the reintroduction of policies that will be particularly attractive to commercial property investors.
That’s interesting Andrew. Does this mean banks are focusing on commercial property and investors are the main beneficiary from these changes?
Banks will always look favourably at commercial property as security and as the chase for yield continues from investors, quality properties with a strong WALE are actively sought after. Acknowledging this, a number of lenders have introduced what is commonly called a ‘lease doc’ policy where the servicing assessment is based on the rental return of the property with no other external financial information required. This can be particularly useful in situations where:
- A syndicate of owners is purchasing an investment property
- A borrower has a complex financial structure
- A borrower is emerging from a difficult trading period (e.g. post COVID) and the improved performance may not yet reflect in their financial statements.
Rates on offer for these products remain competitive and at the time of writing (7 June), 3.24% variable is readily available with gearing up to 70% of valuation as an example.
It is important to point out that non-bank commercial lenders are more prevalent in the commercial property market than ever, providing a compelling alternate solution for borrowers, for example offering loans over longer terms (up to 30 years) and gearing up to 80% of valuation.
An experienced commercial finance broker is an important ‘trusted advisor’ to help businesses navigate the various options available.
The chase for yield is not just confined to investors. Commercial lenders are also keen to diversify their balance sheet and look for opportunities that are not necessarily secured by real estate.
Andrew, does this mean that lenders are moving away from a ‘mortgage mentality’ when lending to small businesses?
It is true that there is often frustration at commercial lenders lack of preparedness to back a business that has a significant investment in business assets (tangible or otherwise) when considering commercial lending.
A pleasing recent development in the market is some lenders have introduced specific policies for commercial loans that are either unsecured or secured by business assets alone while others have renewed focus on lending to Small and Medium Enterprises (SME’s) and are prepared to take a more flexible approach to assessing their lending requirements. This can provide business owners the opportunity to create a blended financial solution, even financing up to 100% of the purchase price of commercial premises in effect turning rent into equity.
Whenever a business is considering an option like this it is always important to work with your trusted advisor to understand the impact on cash flows on the business, for example a high interest rate short term working capital facilities on offer from some specialist non-bank lenders would be unlikely to be appropriate to be used for purchasing property.
To put some context on this, businesses with a good credit history & profitable trading can (subject to meeting the lenders criteria) access unsecured lending products priced (at the time of writing) in the range of 8.00% to 10.70%.
Join Jason Luckhardt and the REIQ’s Commercial and Industrial Chapter for a post-financial-year analysis of Queensland’s commercial property market on 4 August. Find out more.