Commercial property needs finance that fits the plan

There’s quite a lot of money looking for a home in commercial property finance at the moment. UK Finance’s latest figures put gross lending to SMEs at £5.35bn in the second quarter of this year, the highest quarterly figure since the pandemic.

You could look at those figures and conclude that commercial property finance is in particularly rude health, and to a degree, it’s difficult to argue with that. Lenders want to lend and there’s a decent amount of competition for business that fits, which is obviously preferable to the alternative if you happen to be a broker trying to finance a commercial property.

But I think there is a slight danger in thinking that greater lending appetite automatically produces a better commercial mortgage market. The Bank of England’s September Agents’ Summary found that credit supply continues to outstrip demand, while commercial real estate development and investment activity is being held back by high construction and finance costs.

So, we have the slightly peculiar situation where there is plenty of money available but not necessarily plenty of transactions on which it makes sense to deploy it. That puts the broker in a rather different position from one where the main problem is simply finding somebody willing to provide the finance.

A willing lender is only half of the equation

Finding a lender prepared to lend on a deal isn’t necessarily the difficult part. You still have to work out whether the finance makes sense for this particular borrower and this particular property, and that can become rather more engaging when a dozen lenders are telling you that they would quite like the business.

Take refinancing, for example, where the temptation is naturally to look at the rate a client is paying and compare it with the rate somebody else might offer. A difference on paper can look perfectly respectable until valuation costs and legal fees are woven into the calculation, at which point the saving can become less spectacular.

The same applies when capital is being raised against a property, because the fact that somebody can borrow more is not by itself much of an argument for doing so. What the money is for and whether the additional borrowing leaves the client in a sensible position over the term of the loan deserve rather more recognition than the maximum LTV on the sourcing system.

The length of the loan term is also an important consideration. Short-term finance has a clear role where a borrower is buying, improving or preparing to sell a property. But if the plan is to hold it as an investment or use it as business premises for years to come, the finance should reflect that. A loan that requires another refinance well before the borrower expects to sell can bring extra costs and uncertainty, even if the initial rate looks attractive.

This is where commercial lending can be much more interesting than a simple exercise in finding the cheapest product. Two borrowers can own properties that look very similar from the pavement while having completely different businesses behind them, and once you start looking at how the property is used and how the debt is going to be serviced, you very quickly discover that the similarity only gets you so far.

Part of our thinking when we developed Alternative Commercial Mortgages at Alternative Bridging Corporation was to deliver a proposition that is able to meet a diverse range of borrower requirements, with longer-term finance across commercial and semi-commercial property, terms extending from five to 30 years and lending available up to 75% LTV.

I’m conscious that launching a commercial mortgage proposition and then writing about the amount of competition in commercial mortgages leaves me open to a fairly obvious accusation. We haven’t launched ACM because we think the market is short of lenders willing to put money out; we have done it because we think there are commercial borrowers whose cases benefit from the sort of individual underwriting we are used to applying elsewhere in property finance, but who need debt measured in years rather than months.

Where a borrower needs a longer-term home for the debt, we now have another way of looking at the case rather than trying to make a short-term solution do a job it was never intended to do.

I suspect commercial lending will remain fiercely competitive because there is capital available and lenders plainly have an appetite to deploy it. That’s a decent position for brokers to be in, but it also means there is less reason to tolerate a proposition that doesn’t fit simply because it happens to be available.

If credit supply is running ahead of demand while conditions in commercial property remain difficult, the skill is not going to be finding money at any cost; it’s going to be putting the right debt against a property where the numbers genuinely work and knowing when not to force it.