Commercial property performs strongly in a recovering economy as investors pay higher and higher prices in order to access rental growth potential.
Reflecting this, the UK commercial property sector recorded its strongest performance since the financial crisis in the second half of 2013 and some investors are now forecasting double-digit returns for 2014.
For mortgage brokers, the commercial sector therefore represents a potentially valuable new business opportunity – particularly for firms that have previously focused solely on residential loans.
Making the transition
There is certainly no reason why brokers with a purely residential background to date can’t move into the commercial sector, as long as they understand how its differences represent new challenges.
The key concept to grasp is that residential and commercial properties are valued quite differently – and the lender needs more information to assess a commercial deal.
Residential properties are valued on a comparison basis, i.e. what have similar properties in the immediate locality sold for on a per square foot basis? There will be some variation for specification, but location is paramount.
Income is key
The value of a commercial property, on the other hand, depends in large part on the quantum, quality and duration of income generated from the property (either rental or trading profit); and, if vacant, on the potential future income.
Location, specification and configuration will all determine the level of income achievable. A commercial property valuer will apply a yield (for investment property) or a profit multiple (for trading properties) that will set the value.
For this reason, a lender will need full information on any current or proposed tenants. If the property is a trading business, they will need the last three year’s trading accounts together with management projections for the year ahead.
While this information supports the value, it will also inform the lender on whether the borrower can adequately service the loan or needs to retain or defer interest.
More work, more reward
So, preparing and managing an application for a commercial mortgage requires more work than for a residential loan, but it should all be readily available from the property owner.
Furthermore, the potential rewards are significantly higher – for while commission rates are broadly similar across the commercial and residential sectors, the transaction sizes on the former are usually much larger.
There are fewer lenders in the commercial property sector than for residential mortgages and brokers will also need to get to grips with the different types of finance available.
Bridging finance
Bridging finance, for example, is increasingly important in a market where commercial property investors can’t always get longer term finance sufficiently quickly to take advantage of opportunities as they come up.
Loan sizes also tend to be smaller – many lenders do not feel comfortable offering a loan of more than 60% of the value of the property.
And different lenders tend to specialise in different types of borrowers – so one lender may offer better value for a client pursuing a larger transaction, but less attractive terms on smaller deals.
Minimum fuss
For all the differences, however, the core task for brokers in the commercial and residential mortgage markets is identical: clients want the best possible mortgage deal arranged as quickly as possible with the minimum fuss.
Brokers who are able to deliver on that demand at a competitive price stand an excellent chance of reaping the rewards of the recovering commercial property market.
