Commercial mortgages cover a wide range of properties and can broadly be defined as loans secured on property used wholly or in part as a form of business. Security ranges from an owner occupied guest house to industrial property such as a factory. Buy to let also falls into the commercial category, as it is a property let for income rather than being the owner’s residential dwelling. However, buy to let is the only area where residential lenders are happy to cross into the commercial market.
With all the coverage of the boom in buy to let at the moment it is perhaps not surprising that the commercial market has also been buoyant of late. House price inflation and demand have been strong without being as spectacular as the residential market. The commercial market is naturally linked to the performance of the economy, and in particular consumer spending which has also held up well in the recent past.
Regionally the market is less skewed than the residential sector. There are key areas of high demand around the main conurbations and industrial towns, but in general a more even spread of valuations is the norm. The greatest variation exists where the business property has alternative residential use, and in this case price moves are closer to the residential market.
However, the highs and lows in commercial property are generally different from those in the residential sector and reflect the businesses the properties are used for. For example, hotels and guest houses prosper when foreign travel falls back. So in the wake of 11 September and the increased risk and profile of terrorism, commercial property prices in this market have risen as the public switches to domestic holiday destinations.
Figures from the Confederation of British Industry (CBI) show demand for commercial property is increasing and this is expected to continue with the arrival of more specialist products. More and more people want to run their own business and enjoy the benefits of property ownership too. At the same time commercial investment property continues to benefit from the relative insecurity of the equity markets and under performance of pension funds. Indeed as the buy-to-let market has grown and become more competitive with prices becoming increasingly expensive, the professional landlord has turned to commercial property to add some value and diversity to their portfolio.
The under-performance of pension funds has also meant that people are looking to make their plans work harder and a growing number are investing in deals through their self-invested personal pension (SIPP). This is a fairly sophisticated area and is the type of transaction that is more relevant for the larger commercial investment property.
Loan sizes vary by lender. The typical range is £50,000 to £1.5m but the market offers £25,000 to £25m. There are many lenders from clearing banks and building societies to small credit impaired lenders. At the top the banks lend to large, low risk, low margin customers with full audited accounts (three years), cash flow forecasts and detailed business plans. At the other end there are specialist credit impaired lenders who focus on borrowers with defaults and low status. Like residential cases, occasionally lenders will not be willing to deal with a borrower who has a complex credit history, and this is where intermediaries can add value to clients disenfranchised by their financial situation.
But to many brokers the commercial market is an untapped opportunity much like the non conforming residential market was ten years ago. Many clients cannot raise money on their property because they do not meet either the residential lender’s criteria (residential type security with a commercial purpose), or the commercial lender’s criteria (no audited accounts or business plans) and so have nowhere to go. In addition to this commercial demand, the residential mortgage industry is fast changing and intense competition continues to erode revenue for introducers. With so many existing skills already in place, the commercial sector offers attractive options for residential brokers.
With a simple and straightforward approach from a lender a good broker would expect conversion rates of 75% from completed applications to payouts. Combine that with unsatisfied demand, and uncapped commissions and the good broker has a great future in this market.
Traditional high street lenders rely on their direct operations to generate the majority of their business. Historically their intermediary operations have required the broker to give up control of processing the case and this together with the branch origination channels has resulted in income potential that has not been exciting for brokers. With the emergence of specialist lenders there is now a real focus on the intermediary community.
In addition to good application processes, specialist products provide greater flexibility and are more relevant for today’s small and medium enterprise marketplace. Self-certification of income, clear product criteria, allowing the broker to package the case, decision in principle facilities and conditional mortgage offers are real innovations for the commercial mortgage market. And more is yet to come – the market is young and offers real opportunity.
Commercial property prices are controlled by the building’s business use and not residential market influences.
Loan size varies from £25,000 to £25m although the majority fall between £50,000 and £1.5m.
15% of the commercial mortgage business is done through the intermediary channel.