Commercial mortgages have been good for all

Over the past couple of years, one of the best performing asset classes in terms of overall returns has been commercial property. But what part has the commercial mortgage market played in this success?

Two things have happened in recent years which are likely to have had an effect on the market. First, interest margins for prime business have been forced down as competition has increased.

It is not unusual these days to see margins as low as 1.25% over base rate for owner-occupied deals and even lower for good quality investment deals.

This, coupled with the sustained low level of base rates over the past few years has meant that investors have been buying commercial properties at low yields, which has had the effect of driving up prices for investment properties.

Lower rates have also reduced costs for trading businesses buying their own premises which must have had a positive effect on the economy in terms of increasing profitability and encouraging business investment.

At the other end of the market, the entry of new lenders has created a massive increase in the availability of funding on a self-cert or non-status basis.

This has allowed many business people to buy premises for their firms who would previously have had no chance. With their lack of accounts to support proposals, traditional lenders would not have assisted.

It has also in-creased the level of finance for new ventures, which historically have been diff- icult to fund. Coupled with this, higher LTVs have be-come available with up to 85% now common, and this again has made it easier for businesses and investors to buy commercial property.

The fall in interest costs and the more ready availability of commercial mortgages must have had a signifiandy young is managing director of The Business Mortgage Companycant impact on the level of business investment in recent years.

During this time there has not been a substantial increase in business failures and the logical conclusion is that most of these businesses are still trading. This must have had a positive effect to the economy.

Where do we go from here? Cynics would say that sub-prime commercial lenders have not yet had to cope in a recession and this is certainly true.

With interest rates rising, this would put pressure on some businesses and may cause failures to rise and also put pressure on commercial property prices as more properties come onto the market.

It should not be forgotten that most business owners also have residential mortgages and the effect of rising interest rates on them is magnified as they also need to take higher drawings from their businesses to service this.

I’m no economist but I like to think that it is partly as a result of the changing commercial mortgage market that the broader economy has been so strong over the past few years.

I’d also like to think that the wave of new businesses and the expansion of existing enterprises will underpin activity to the extent that the commercial property market will continue to flourish.