There is an old adage that knowledge is power. While the philosophy is not ground breaking it still rings true for investment in the commercial property market, where finding out about the most appropriate products available can prove exceptionally difficult.
The problem was highlighted in Don Cruickshank’s Competition in UK Banking report published in March 2000. He recommended that there was a need for: ‘Better information to help customers, particularly those excluded from banking services and small and medium-sized enterprises (SMEs) to find the best banking deal available to them.’
For those businesses looking to take out a mortgage, information-gathering on products and their availability is still a problem, and despite the recommendations of the report there is still much to do.
Richard Mason, a director of Mortgage 2000 and moneysupermarket.com, agrees that divulgence of information to the business community is not happening effectively in the commercial mortgage market.
He says: ‘There are few commercial mortgage sourcing systems around, making it difficult for IFAs to know what is in the market.’
If it is difficult for IFAs to know what products are out there, what chance does the end customer have in getting a decent aggregate view of the market?
When Cruickshank compiled his report, he found the four big banks at the time ‘ HSBC, NatWest, Lloyds TSB and Barclays ‘ provided the banking needs of 83% of the SMEs in the country.
Mason says he has seen little evidence to suggest there has been any shift in the commercial banking sands, or that the provision of commercial mortgages bucks this trend in any way. Indeed, following the merger between NatWest and the Royal Bank of Scotland the Big Four’s market share has grown.
Although there are 63 lenders offering commercial mortgages in the market, according to Mason, they are scrabbling for less than 20% of the business. This makes it difficult to generate the volume and scale needed for products to be developed and competition to flourish.
One of the main difficulties for the smaller lenders is advertising. Commercial mortgages are needed across the country by those involved in all types of commerce, and so to get decent amounts of business, marketing has to be done nationally, and across multiple mediums. For many this tactic is simply not an option due to the expense involved.
It is also difficult for smaller lenders to get their message past that of the big banks. They already have many potential commercial mortgage borrowers on their books, and have branch networks, and national advertising and marketing campaigns rolling continually.
Those borrowers who do look outside the top handful of lenders may get better deals, but will often use this simply as a bargaining tool with the bank to get them to drop their initial offer.
The waters are murky for the potential new lender looking to enter the market, but there are still companies prepared to take the plunge.
Commercial First is in the process of promoting itself and getting a network of IFAs, brokers and packagers on board through which to promote and sell its products, when it starts lending at the end of November.
Joint managing director David Johnson feels there is certainly room for a new, centralised commercial lender in a market where the big banks dominate, and there is a lack of choice for the property investor. He says the market is underserved and is adamant there is a place for lenders offering innovative and efficient products. Commercial First is looking to operate a ‘hands on and transparent’ philosophy, focusing on service.
This promise has been offered to the market before, and proved to be a potent tool if delivered. We will have to see how things work out. Either way, Johnson has targeted £300m of lending in the first 12 months, focusing on the SME businessman who owns their own operation.
He accepts it may be difficult, but turns back the clock to look at younger lenders such as Kensington, Platform and Verso. All are now established and respected operations, despite being barracked by the usual crows of cynicism when they announced their intentions. Johnson believes the commercial market is ready for such an infusion of new blood.
Expansion on the horizon
Abbey National clearly thinks there is room for growth in the commercial market too and is set to expand its distribution network and product base. In the past, most of its commercial mortgages (90%) were done through its subsidiary First National. However, from 1 October this changed, and the commercial mortgage operation now comes under the Abbey National brand.
Mark Stephens, director of business development at Abbey National, says: ‘We offer mortgages between £25,000 and £500,000 at the moment, but we are going to extend that range to £25,000 and £5m.’
Stephens agrees with Johnson: ‘High service and fast turnaround’ are essential in the commercial market. He says Abbey National can deliver and utilise its existing customer base, distribution network and sales teams to push the business along. Abbey National also aims to give borrowers access to specialists from all corners of the commercial market to ensure they are talking to someone who knows their business.
Stephens thinks some clearing banks that have been operating in the commercial sector may find it hard to continue. He says: ‘Clearing banks have been aggressive in their growth strategies, piling on loans and recruiting staff. They may have to rethink their strategy.’
This would clearly suit new entrants such as Commercial First, but Stephens is quick to emphasise the value of expertise and highlights the need for skilled personnel if a commercial mortgaging venture is going to be a money earner.
He adds: ‘I have lent through two recessions successfully and it can be done.’ Like anything else he says it is about knowing where the potholes are and steering around them.
In the owner-occupied market potentially difficult times lie ahead. Stephens adds: ‘I can see the owner-occupied small and medium-sized enterprise market coming under pressure due to economic conditions and poor returns on equities, among other things. If there is then a dip in retail spending this could affect a lot of small traders and have a knock-on effect on the mortgage market. We are watching that part of the market carefully.’
However, in terms of property investment, the commercial market continues to attract new money.
Ralph Arnold, manager of commercial mortgages for broker Decision Finance, says: ‘Investors are switching from residential buy to let to commercial buy to let, particularly in the bigger cities.’
He says this is because ‘the yields in residential buy to let are down more than in the commercial market.’
From NatWest’s point of view: ‘Two drivers are particularly apparent. The low interest rate environment has stimulated interest from businesses wishing to commit to long-term borrowing to purchase property. Second, the poor performance of the equity markets has prompted both individuals and companies, notably pension funds and life assurers, to view commercial property as a more favourable investment vehicle.’
However, the risks involved in the commercial market are also higher and IFAs must ensure their clients heed the old adage caveat emptor.
Although the majority of the products in the commercial market are put together in a bespoke fashion, this does not lead to the flexibility one might expect. Indeed, borrowers should be wary of administration and remortgaging costs.
David Wittaker, managing director for broker Mortgages For Business, says: ‘The commercial mortgage market has not yet found a way of reducing the transfer costs on commercial mortgages. Typically, a borrower will be faced with a lender fee of 1% and a more expensive commercial valuation than would be applicable to a similarly valued residential property.’
Solicitors’ fees and redemption costs are more expensive, and although he does not feel the commercial market will ever match the residential market, Wittaker concludes: ‘There is still some way to go in increasing the liquidity of the market by pruning the costs of transfer to a point where customers are more readily able to conclude transactions.’
Despite this, there has been a move on the products available in the market. Wittaker says Norwich & Peterborough has lead the way with current account-linked offerings while improvements in servicing are beginning to kick in from lenders across the board.
However, this innovation and improvement will have to continue if headway is to be made into the huge market share controlled by the Big Four, and consumers must be aware of the alternatives.
But as a spokesman from NatWest says: ‘We believe our ability to offer a full banking package including money transmission, cash management, a range of accounts to manage surplus funds, Treasury solutions and specialist finance, makes us more attractive than smaller market players.’
It is up to the other lenders to find differentiators to undermine these strengths and improve the options for the property investor.
Edward Murray is news editor
There are commercial mortgage options outside the major banks, but sourcing them can be problematic.
Clients must realise the costs involved for commercial properties are higher than in the residential market.
Low interest rates and poor equity returns continue to make commercial property an appealing investment.