Access FS

Commercial lending: specialist vs high street

Karl Wilkinson discusses the state of play in the commercial lending market with two of his specialist commercial brokers to find out what’s getting easier, what is more challenging, and how commercial lending differs from the residential mortgage market.

Karl Wilkinson

CEO, Access FS

Arecent interview with Buket Bayrak and Bhusshan Tawade reveals real disparities in a number of areas of commercial lending between high street and specialist lenders, including attitude to risk, loans-to-value (LTVs), and even down valuations.

The commercial lending market is tightening, but nowhere near as much as the residential mortgage market. Where interest rates have risen as much as one per cent, or 100 basis points, on buy-to-let over the past six months, on a commercial mortgage from challenger Interbay, for example, rates have risen, but only from 4.99 per cent to 5.29 per cent – a mere 0.3 per cent. In the residential market, rates have risen even further – by as much as 150 basis points in some cases, according to Moneyfacts.

While the demand from borrowers wanting commercial loans has continued to rise, lenders’ appetite has tightened noticeably. High street lenders such as Lloyds, NatWest, and Barclays have the lowest rates by far, often only three per cent plus base rate, but the big banks are clearly cautious about the uncertain market. Their criteria have become so strict that Bayrak said, “It is clear that they are choosing to cherry-pick just the very best cases with the most robust evidence. If a borrower has not got at least a 50 per cent deposit, then they are not going to stand a chance.”

“We notice the high street banks looking at investors in more detail,” Tawade explained. “If there are resident tenants in the commercial property, the banks now look closely at the quality of those tenants. A lender will expect to see the terms of a lease. They will want to know what the rent is and what the break clauses are, if any.

“They will also want to know how consistent the tenants have been in paying over the past two years, including during the pandemic. Fundamentally they worry about what will happen should the property become vacant. Every lender needs to know whether the borrower has enough personal income to service the mortgage, and if they don’t, how the monthly payments will be made.”

A big factor over the past year is whether the borrower took bounce-back loans or other government initiatives such as CBILS. These are used as indicators of how robust a borrower’s business is.

Ideally a lender is looking for borrowers with good portfolios that are not too highly geared. They also want borrowers with experience, who know how to run a commercial property and who have already made a success of it.

This caution is leading to down valuations. Bayrak said.

“The high streets are now full of empty shops, some of which have been empty for some time, and this is driving commercial property prices downwards,” said Bayrak.

As the big banks have become stricter, it has opened the door to the more entrepreneurial challenger banks. In stark contrast, challengers, such as Interbay, Allica Bank, and even Shawbrook, see the market conditions as an opportunity and are proactively looking to lend. Rates are notably higher at more than five per cent or six per cent, but they will lend up to 75 per cent LTV and are competing with one another to get the business.

One might wonder why an investor would pay over six per cent for a commercial loan if they can get one for

As the big banks have become stricter, it has opened the door to the more entrepreneurial challenger banks. In stark contrast, challengers ... see the market conditions as an opportunity and are proactively looking to lend

three per cent. As Tawade explained, “For some investors, particularly those who do not have a large deposit, the interest rate is not the most important element. For some the returns lie in the market value of the property, its potential to increase, and the value of the business. For these investors commercial property is still a huge opportunity. For them the important thing is not the interest rate, but getting a loan to capitalise on the growth potential while putting in the smallest deposit.”

The challenger banks still require a solid business case, of course, and brokers helping their clients to provide the right information can be the difference between an investor getting a loan and not.

Specialist lenders usually look for evidence of the investors’ experience in handling void periods, and at their financial standing, including assets and liabilities; sometimes additional information such as an SA302 tax form can be key. If lenders still aren’t sure, Tawade will often invite a lender to visit a site in person – for example, to see how close a building is to a town centre. “This can make such a difference,” Tawade said. “And as soon as these boxes are ticked, lenders fall over themselves to provide the mortgage offer.”

The challenge for many brokers is really knowing the commercial market – or even being allowed to operate in it. Many networks or larger brokerages still don’t give their advisers the necessary permissions to provide advice on commercial loans. With no product-sourcing systems for commercial mortgages and things changing on an almost daily basis, it can be hard for any broker not dealing with them regularly to know where to go.

Even if there were a product-sourcing system for commercial loans, you can’t source a lender’s appetite to lend. When brokers know what they are talking about, the chance of completion increases 100 per cent.

With demand from investors continuing to rise and the returns for brokers significantly outweighing those in the residential market, it makes sense that more brokers would want to operate in an environment in which commercial is part of the mix.