The number of enquiries for commercial mortgages has risen in the past six months and shows no sign of stopping.
There has been a big move to use commercial lenders to cater for portfolio landlords with more than four properties, semi-commercial investment properties and even for finance for trading businesses. As this volume continues to pick up, the message is clear: commercial lenders, or a route to them, need to be in every broker’s toolbox.
Commercial lending is starting to fall under the grander headline of ‘specialist lending’ but it is, and always has been, a category in its own right. However, the lines are being blurred; true commercial stays as commercial but buy-to-let now often falls between residential specialist lending and commercial lending.
It is the bigger residential buy-to-let properties that can make things challenging. Even if it is possible to transact them through residential lenders, it may prove more expensive overall, although most people think it is the other way around.
Take a recent case of ours that had 11 flats on one freehold: most residential lenders would not look at it because there were too many units. So the landlord had two options:
- split the flats into two different titles, thereby bringing the number of units down to the amount that most lenders would accept; this would make it a solicitor’s dream as the costs racked up, but the broker would be able to place it with two different lenders; or
- put it with a commercial lender that would accept the whole lot.
In this case the loan came in at 4.5 per cent. The alternative of splitting the title to use residential lenders would have been, overall, more expensive than the commercial loan — and considerably more complicated.
As for the year ahead, 2018 continues to look good in terms of both owner-occupier and investment.
Rics stated in recent survey results that, “at the 12-month horizon, projections are now comfortably positive in both prime and secondary office submarkets. Industrial assets still exhibit the firmest 12-month outlook, compared to all other categories. Secondary retail is the only submarket in which respondents anticipate a fall in values over the year ahead”.
This outlook is supported by the increase in enquiries that we are receiving at Connect for Intermediaries, covering a variety of sectors and geographical locations. London remains strong but we are seeing more and more enquiries from around the UK.
Commercial lenders, or a route to them, need to be in every broker’s toolbox
Two sectors in particular have experienced extra activity recently, the first of which is overseas investors. Their interest in a wide range of sectors continues to grow; not just in residential — where they have always been strong, particularly in London — but also in industrial. They are widening their horizons regarding both sector and geographic region.
The second sector is care homes. Growth will no doubt continue this year and beyond as demand increases from our ageing population. This opportunity will not only draw the investor to this market but entice existing care-home owners to expand, and new businesses to enter the sector. Lenders will, in turn, no doubt increase their appetite for this type of business to satisfy demand. However, the nature of the sector means they will be understandably cautious.
The retail sector is the one with some negativity around it but this is mainly in secondary locations, which is hardly surprising given the increase in online shopping. This means lenders tend to look to the major conurbations when lending in the retail sector, especially in Scotland and Wales. Northern Ireland continues to be bereft of challenger banks, which it needs to put it on an even playing field with the remainder of the UK.
This means brokers placing a retail commercial deal will need to look deeper into the business before presenting their case to a lender. They must truly understand the business, including its history, its future plans and why it believes it will succeed in the premises in question. While some lenders may have reservations, these could be mitigated by the strengths of the business and of the individuals running it.
The presentation of a commercial deal to a lender in a way that will obtain the best result remains a specialist skill. However, that does not mean that commercial is a niche within specialist lending. It has stood on its own for a long time and is big enough and strong enough to remain that way.
Kevin Thomson is sales director at Connect for Intermediaries