Despite recent movement by lenders, commercial loans remain far outside the comfort zone of most brokers
For the first time in several years we have seen real movement from lenders on commercial mortgages. This type of business has taken a back seat to buy-to-let and bridging for almost a decade after lenders got their fingers burnt in the aftermath of the credit crunch.
The high-street banks – which instantly shrank from commercial business – have slowly re-entered the market, but at rates and on terms many borrowers have considered unworkable. Smaller semi-commercial and commercial projects have been fundable but it has taken experience, nous and strong relationships with a few niche lenders to place these sorts of deal.
The fact that this situation, thankfully, has changed in the past six months or so has perhaps been driven by the pressures mounting on buy-to-let business. With stress testing becoming more onerous and lender appetite dampened as a result, we are seeing much more willingness from challenger banks to offer commercial loans at more reasonable pricing as they compete for business.
In the past month alone, both Interbay Commercial and Shawbrook Bank have upped their game on the commercial side, in terms of service provision and loan criteria and pricing.
Indeed, professional and experienced landlords and developers are looking for ways to either maintain or improve their yields, and commercial and semi-commercial properties are an obvious option. Challenger banks agree and are beginning to facilitate the purchase of higher-value assets, taking a slightly more relaxed view on things that had often caused problems in the past.
Also particularly encouraging has been the apparently genuine appetite to increase loan sizes without penalising borrowers on loan-to-value. This is by no means evidence of increased risk taking in the sector; quite the opposite, in fact.
For far too long there has been a gap in the provision of competitive commercial finance to smaller and medium-sized businesses and commercial investors. The big banks have supported large-scale projects and there has been a steady stream of finance for smaller deals with low gearing. But the mid-market has remained woefully underserved.
Meanwhile, some banks are showing an appetite to be flexible on interest-only commercial mortgages too, which has the benefit of making loans far more affordable for borrowers focused on yield.
Similarly, where in the past commercial lenders were rigid in their assessment of value based on vacant possession, they are now beginning to apply more nuanced common sense to valuations.
Commercial property operates on a quite different set of factors from residential, making vacant possession too blunt a measure of value. Commercial landlords are in receipt of far more lucrative rental income, on much longer leases than residential counterparts.
Underwriting these loans is more specialist, however: a clear grip on the commercial environment and future profitability of the business in the premises is the critical measure of affordability. Challengers are recognising this and adjusting debt service ratios to reflect the strength of the underlying business, which is welcome.
But despite all this, commercial loans remain far outside the comfort zone of most mortgage brokers. Buy-to-let may have become mainstream but semi-commercial lets are only just starting to gain meaningful popularity among less specialist investors.
This is not a reason to turn away these clients. You could be shooting yourself in the foot for the future.
Buy-to-let as a sector is changing. Those landlords that remain are professionals, running their portfolios with the intention of profiting from their investment. As long as cost pressures exist on residential buy-to-let – and they are set to only get worse over the next three years – there is likely to be a growing demand for the yields found in semi-commercial and commercial deals.
You do not have to be an expert to help your clients benefit from a broader approach to property investment. Just find yourself a reliable partner who can support you in extending the service you offer to clients.
Lucy Hodge is managing director at Vantage Finance