Innovation and addressing underserved markets is essential for 2024 – Renwick

An important factor in the health of the commercial property sector next year will be the pricing of the funding available.

The consistent increases to base rate, driven by the Bank of England’s desire to get inflation under control, have translated into higher costs for commercial finance. However, we may have reached the end point of these increases, with the central bank opting against further hikes in successive Monetary Policy Committee (MPC) meetings, following 14 consecutive rate increases, while the consumer price index measurement of inflation has dropped to 4.6 per cent.

As a result, crystal ball gazing is increasingly turning to how soon the base rate is reduced, with some already forecasting cuts in the second half of 2024. If that happens, then we may see more competitive pricing and a boost to interest in investing in commercial assets.

There is the complication however of the Basel international banking standards, commonly referred to as Basel 3.1. The existing Prudential Regulation Authority (PRA) consultation proposes to significantly increase the level of risk-weighting banks would need to apply to SME lending, and is particularly unkind to those looking to secure lending against commercial property. As such, there is a danger that any fall to the base rate is cancelled out by banks passing on the heightened costs of capital directly onto borrowers.

The boost for commercial property investment

Despite this, there is growing confidence around commercial real estate. There’s no escaping the fact that 2023 has been incredibly difficult for the sector. Rising interest rates have presented a challenge, and perhaps unsurprisingly have held back investment into commercial real estate to levels significantly below that which we have seen in recent years.

However, there are cautious signs that this is turning around. Rates are already heading in the right direction, and this is only likely to continue given the expectation that base rate has peaked.

This has prompted increased optimism around the prospects for the stabilisation of capital values in 2024 and beyond, boosting the chances of improved transaction levels in the short term.

Filling the gaps

The attitude towards commercial property among lenders is not homogenous; there have long been certain sectors which lenders have approached with apprehension post Covid-19, leaving businesses frustrated. They may be perfectly good borrowing prospects, but they are excluded from accessing the funds required simply because lenders do not sufficiently understand those industries.

It’s something we have seen first hand within the healthcare sector in particular. Atom bank has worked with care home operators who have been overlooked by other funders, perhaps because they are first-time operators or because they are looking to take on larger, purpose-built care homes.

There have been similar issues afflicting those in dentistry or pharmacy, areas of the market where lenders are so wary that threading the needle of their criteria is extraordinarily difficult.

The economic challenges that persist mean this attitude among some lenders is only likely to continue. As a result it’s crucial for brokers to identify the lenders who are able to take a more informed position towards funding these sectors, and are therefore better placed to support would-be business borrowers.

The need for innovation

Beyond stepping into these underserved markets, there is also the need for innovation among lenders towards their products.

This is particularly true when it comes to green issues. While the government has recently opted to row back on a host of its green pledges including minimum energy efficiency for residential and commercial assets, the likely direction of travel over the longer term horizon is undeniable. As a result there is a real need for lenders to embrace this opportunity and develop products which can help businesses improve their green credentials, such as commercial retrofit loans and lending for green assets.

However, even outside of environmental areas it’s vital for lenders to take a fresh approach, identifying more creative ways in which they can support business borrowers.

The political question

Finally, it’s worth remembering that we have the spectre of the general election next year. There is inevitably some uncertainty here which will prompt some businesses to take a ‘wait and see’ approach towards their investment activity until they have a better idea of what lies ahead from whoever forms the next government.

As we have already seen with the Autumn Statement, the temptation will be there for the government to provide ‘giveaways’ to boost their prospects in the election and attempt to address short-term issues as opposed to focusing on the longer-term challenges that are inhibiting GDP growth.