Harnessing Disruption in Commercial Lending


The time is ripe for brokers to take advantage of opportunities in the commercial lending market, which is seeing steady growth and has the potential for much more.

Commercial Lending is often seen as countercyclical to the residential market due to its diversity and the different cycles of the products involved.

Disruptive factors such as inflation, higher rates, consumer uncertainty and supply chain issues impact commercial in different ways to residential, but the underlying message from non-bank lenders is that the best opportunities in such an environment lie in non-traditional options.

“We expect private lending to continue to flourish as the [commercial] sector offsets the tightened credit appetite of traditional lenders,” says Aquamore head of distribution Matthew Porch.

Like in overseas markets, particularly the US, Porch expects major banks in Australia to batten down the hatches and focus on residential, driving commercial opportunities to alternative lenders.

“The corresponding opportunities for brokers are to be in tune with market movements and become familiar with alternative commercial finance providers,” he says.

Refinancing, negotiating with the current lender and planning exit strategies are all part of the cycle ripe for brokers to expand their businesses.

“With interest rates in an upward cycle, borrowers will want to plan ahead,” says Dean Koutsoumidis, managing director at Equity-One. “There are opportunities to restructure their debt, and this can take many forms.”

With residential markets ebbing, more brokers are looking to commercial for opportunities to help smooth the chop. Brokers who are tuned into their clients’ current and emerging requirements, as well as the alternative commercial finance sector, will be well placed to harness the current disruptive environment.


The attraction of non-banks

Cory Bannister, chief lending officer at La Trobe Financial, explains why more commercial clients are likely to shift to non-banks as turbulence increases.

“A rising interest rate environment can often cause headaches for commercial borrowers, particularly if they have ongoing review clauses and covenants attached to their loans, a common feature of commercial loans provided by the major lenders,” he says.

“Each year, and in some cases more regularly, key commercial loan ratios are reviewed for compliance.”

This can include a revaluation of the property to test the LVR threshold, reviewing the interest cover ratio to ensure the approved ratio is maintained, or assessing the borrower’s debt-to-income position, to name a few.

“All of these tests are likely to come under pressure in the current economic environment, which may mean commercial borrowers will need to seek alternatives,” says Bannister.

“A rising interest rate environment can often cause headaches for commercial borrowers, particularly if they have ongoing review clauses and covenants attached to their loans” – Cory Bannister, La Trobe Financial

Brokers stand to gain from this dynamic as borrowers look to the less rigid options available at non-banks for financing commercial property.

La Trobe Financial is seeing an uptick in this type of business of late. “We are finding an increasing number of brokers turning to us for assistance for ‘set and forget’ commercial property loans, particularly as our maximum loan size of $25m means we are one of a few non-bank lenders able to stretch to assist blue-chip commercial property owners,” Bannister says.

Other non-banks report the same trend away from restrictive terms and towards simpler lending options.

Thinktank loans allow refinancing to 30-year terms, which can reduce monthly loan repayments and improve cash flow. “This overcomes the restriction of those commercial property loans that have been limited to a short amortisation period that matches or is less than the WAULT [weighted average unexpired lease term] or WALE [weighted average lease expiry] associated with the related security property,” says the non-bank’s general manager partnerships and distribution, Peter Vala.

Thinktank is seeing a similar lift in refinancing of existing commercial loans to more flexible set-and-forget facilities as borrowers seek certainty and peace of mind.

“[This is] even more so if the borrower’s current loan might be short-term, subject to annual reviews or covenant compliance measures,” Vala says.

“Demand for warehouse and logistics property continues to be strong, with no let-up in the demand for longer-term financing solutions” – Peter Vala, ThinkTank.


It’s the economy, stupid

Economic sentiment is shaky of late. The Westpac-Melbourne Institute Consumer Sentiment Index rose in January this year but fell in February and March to near-historic lows of 78.5. Regardless of pundits attempting to call the bottom, sentiment remains well below the neutral level of 100.

Against this background, the latest Thinktank monthly market snapshots continue to show commercial property markets remaining stable in 2023, with industrial property in various locations demonstrating strong outperformance. And MFAA data shows the value of commercial loans settled by mortgage brokers hit a record figure of $16bn for the October 2021 to March 2022 period, up 55% year-on-year.

“There are already strong signs the commercial property market is positioned for growth,” says Pepper Money’s general manager for mortgages and commercial lending, Barry Saoud.

Drilling down into various sectors reveals a mixed bag of fortunes.

“Demand for warehouse and logistics property continues to be strong, with no let-up in the demand for longer-term financing solutions,” Vala says.

More operators are looking to increase onshore production capacity to boost resilience against supply chain weakness revealed by the pandemic, and there’s been an immediate uplift in demand for greater storage space to maintain higher levels of inventory.

“Wholesalers are increasingly turning to domestic production to offset offshore supply-chain lags,” says Porch. “Mining is always steady, especially with lithium remaining in high demand. Tourism appears to be steady, despite steep airfares deterring some travellers.”

Other sectors face headwinds.

“Hospitality is expected to fall as the cost of living continues to rise and discretionary income continues to be squeezed. Similarly, retail is being squeezed by online sales and is expected to keep falling, which will also be compounded by the lack of discretionary income,” says Porch.

“Construction has been hard hit by supply-demand pressures and labour shortages. Many projects are starting to struggle, and those well managed with sufficient cash reserves and cash flow management are in a more stable position to survive.”

Some expect construction to recover quickly if the conditions allow. “We expect the construction sector to pick up, particularly once the official cash rate reaches its terminal level and consumers regain confidence in the market,” Bannister says.

Getting to know the granular detail of various sectors is part of a broker’s job, enabling them to meet a client’s current needs and anticipate future ones, Saoud points out.

“What type of commercial property does your client want?” he says. “Is it a shop, office, industrial warehouse or something purpose-built such as a childcare centre or a service station? Is this an existing business, and if so, what’s happening around the business? What are they looking at in terms of expansion?”

“As more and more mortgage brokers turn to commercial lending, word is spreading that it’s not as difficult to do as some brokers think” – Barry Saoud, Pepper Money.


More opportunities likely in commercial

While there are a lot of spinning plates when it comes to commercial property, this is no reason for brokers to avoid the area – in fact, quite the opposite. The overall number of brokers writing commercial loans in addition to one other type of loan is rising but still under 30%, according to the MFAA.

It’s also well known that the broker share of the commercial lending market is much lower than their share of new loans for residential, at 38% versus over 70% respectively. This underrepresentation is ripe for change.

“We believe the next two years could provide brokers with an opportunity to make significant inroads in rebalancing this ratio, and it’s likely to require the assistance of non-bank lenders,” Bannister says.

Brokers have a chance to diversify away from overreliance on residential. “There’s a lot of opportunity for brokers who do want to step it up, expand their knowledge in the commercial lending space and diversify their business and income streams,” Saoud says.

Pepper Money has made changes to amplify the business opportunities available. “In addition to removing clawbacks on commercial mortgage loans, we’re also expanding our ability to fund commercial properties across Australia, including non-metropolitan and regional areas.”

These opportunities will allow brokers to really appreciate what makes the wider economy tick, because the intensity of the broker–client nexus is higher with commercial, leading to deeper relationships and a stronger bond.

“Commercial contracts tend to have shorter terms than consumer loans, so the contact between broker and client is higher – there are more touchpoints for brokers to capitalise on,” Koutsoumidis says.

“We are unashamedly traditional when it comes to how we support our brokers. We simply are available for them any time” – Dean Koutsoumidis, Equity-One


Changing the idea that commercial is complex

Commercial is probably easier than it used to be. Technology has progressed quickly in the finance sector during the pandemic, with most processes now digital.

“Borrowers can physically be anywhere and still be able to execute documentation for their loan,” Koutsoumidis says.

Even so, people remain central to helping brokers navigate areas like commercial lending.

“We are unashamedly traditional when it comes to how we support our brokers. We simply are available for them any time,” he says. “The best remedy is to have a chat, and we use that opportunity to help our brokers become fully adept in the transaction they are participating in – it’s not rocket science.”

Pepper Money is focused on countering the image that commercial is a tricky area. “We are laser focused on developing broker confidence working in commercial lending,” says Saoud. “We realise the way to achieve this is to make commercial lending as accessible as possible, which is why we’re investing in support, education and tools to make the product easy for brokers and their clients.”

The perception of commercial as difficult to understand is slowly changing as a result. “As more and more mortgage brokers turn to commercial lending, word is spreading that it’s not as difficult to do as some brokers think. In fact, it’s as simple as doing a home loan – or even simpler,” he says.

“Essentially, all brokers are doing is moving money, and all that changes is the security. If a mortgage broker could gather the information for a home loan from a self-employed customer, they would find commercial lending not that different.”


Education is key to success

Saoud has come across quite a lot of brokers who deal with commercial exclusively and think the residential market looks time-consuming and complicated.

“It goes to show that the only obstacle is flawed perceptions, but when we unlock a new level of confidence with commercial lending, we open up new opportunities for brokers,” he says. “It’s about helping the broker realise what they are capable of doing.”

Education can be as informal as a chat with a non-bank BDM. “We do sessions on real-life case studies, and even a simple ‘coffee with credit’ – having a coffee with our credit managers and talking about how they look at a transaction,” Saoud says.

Thinktank offers a range of face-to-face education sessions designed to empower brokers to branch into new areas such as commercial. Relationship managers (RMs) support brokers with transactions from inception to settlement.

“It’s why there are no minimum volume or experience requirements to commercial loans with Thinktank, as our RMs are there alongside the broker every step of the way,” says Vala.

Many alternative lenders host regular education workshops and seminars to upskill brokers on commercial lending. “This includes how to spot opportunities, along with helping implement strategies brokers can implement to support their client base – which was the genesis of the Commercial Market Update live webinar held on March 24 in collaboration with Lumi, Accendo Financial and VeloxCapital,” Porch says.

“We expect private lending to continue to flourish as the [commercial] sector offsets the tightened credit appetite of traditional lenders” – Matthew Porch, Aquamore

Developing links to the commercial sector through networking is also a good strategy.

“We are proud that most of our work comes from word of mouth, so keeping the conversation going with our network is key,” Koutsoumidis says. “We help our brokers walk through the transaction and try to deal with obstacles before they crystallise.”

As major banks continue to offer less-flexible products in a tougher economy, demand for knowledge and service in the non-bank commercial lending arena is only likely to grow.

“Who better to help navigate that transition than brokers?” Bannister asks. “This is where we see significant opportunity in the years ahead.”


Credit to Australian Broker

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