Brokers see rise in commercial mortgage enquiries but cite concerns around variable rates – analysis

Adam Fulcher, commercial finance specialist at Brightstar Financial, said the firm was “definitely seeing an increase in commercial business”.

He said clients were taking advantage of “good purchase opportunities” and “lenders were regaining their appetite to lend”.

Fulcher added: “Clients are looking for commercial and semi-commercial and we are seeing a real mix between those who want to expand their trading business and those who are eager to secure more commercial properties as part of their portfolio.”

Imran Hussain, director of Harmony Financial Services, said the business usually operated in the residential and standard buy-to-let space, but buy-to-let investors were increasingly looking to purchase commercial property.

He said: “As a business, we primarily operate in the residential and regular buy-to-let space. The latter often leads to some of my investor clients wanting to purchase a commercial property, so I always ensure I have a relationship with a knowledgeable commercial broker.

“I have found this year to be very steady, with some landlords exploring commercial property as an investment and also enquiries from business-owning clients looking to purchase property.”

Chris Sykes, technical director at Private Finance, added that his company had been seeing an surge in commercial mortgage enquiries over the last month or so.

He said that there were multiple reasons for this, including improved business performance, the lifting of Covid restrictions and people returning to the city.

“If a business did do well in the pandemic, such as pivoting to online, you would have had a lot of cash so now would be the time to expand and maybe buy another site. Or if your business has returned to normal and footfall has returned then you might look at a commercial mortgage,” he explained.

He added that there had been a “geographical shift” during the pandemic, with London and the South East typically garnering the most commercial mortgage enquiries.

However, during the pandemic there was a “huge shift away [from the capital] and now restrictions are relaxing, we have seen huge shift back”.

“The other element is inflation. People who are looking to invest due to the inflationary environment may look at commercial property. That could act as a hedge against inflation,” Sykes said.

He said the space had a wide choice of lenders, and that high street lenders also had specialist commercial mortgage arms.

“It is a huge space already, I am not sure you are going to get lenders who aren’t in it already pivoting to it,” Sykes noted.

Rob Peters, principal at Simple Fast Mortgage, said during the pandemic many commercial lenders, including those on the high street, “shut up shop altogether”.

He continued: “Those that continued to do business became far more selective about who they would lend to. Sectors such as leisure and hospitality were least favoured by lenders, as they were hardest hit by the restrictions, and hence most likely to default.

“But for some, downturns often create opportunities and the pandemic enabled savvy buyers to find a host of attractive commercial property deals, with the main issue being finding a suitable lending partner to complete the deal. During the latter part of 2021, as restrictions eased, more commercial deals completed as lenders’ appetites returned.”

Borrower type and variable rate challenges for commercial mortgages

Peters said owner operators with strong balance sheets tended to be preferred by lenders and were more likely to secure lower interest rates and higher loan amounts.

He explained: “In the eyes of the lender, risk is reduced as the finance is to a tangible business with a proven trading history. In addition, owner operators are often moving from rented to owned premises, so the additional cost of a mortgage is much reduced, or even negligible.”

Another borrower type, he added, was commercial property investors, and unless the tenants were “high quality” and there was a “strong lease” securing a mortgage may not be as easy.

Peters said: “Investors need to do their due diligence to know their market, both by sector and geography. Investors will ideally seek out deals with potential for increased rent and capital appreciation through underused space, development opportunities, or through new leases and increased rents.”

Scott Taylor-Barr, financial adviser at Carl Summers Financial Services, warned that the “big issue” for commercial mortgages currently was they tended to be written on a variable rate basis.

He continued: “In a market of rising interest rates we see mortgages becoming more expensive than some business owners have seen previously, which adds a degree of extra nervousness into the mix for clients, especially those who have never had any type of commercial mortgage borrowing before.”

Brokers mixed on sustainability of commercial mortgage enquiry growth

Brokers disagreed on whether commercial mortgage enquiries would continue to rise in the coming months or not.

Sykes said that as the inflationary environment looked like it would be a more long-term trend, commercial mortgage enquiries would continue as investors would still be looking for investment opportunities.

Hussain said that how long sustained enquiries would last was “anyone’s guess in the current climate”.

He explained: “There’s a huge amount of uncertainty and big ticket purchases could be seen as too much of a risk, even by experienced property investors.”

Lewis Shaw, founder of Shaw Financial Services said that commercial enquiries had been “pretty consistent” over the past few months but he expected them to slow down in the next few months.

He explained: “I suspect they’ll begin to slow down as rates rise and a potential recession looms, meaning more empty units not generating rent. The new homeworking culture is also hanging over commercial property like the sword of Damocles.”