The snowball effect

Brokers and lenders in the commercial mortgage sector should have been cheered by the latest research published by Savills in its monthly Commercial Development Activity Index.

This showed the strongest rise in commercial development activity for three years in March, in both public and private sector construction, with more than one-third of the survey sample indicating a rise and only 1 per cent indicating a decline.

With two-fifths of respondents indicating a rise in private sector development, this was the most marked increase since March 2004 and private sector development continues to rise more sharply than the pubic sector equivalents.

Crown Mortgage Management has also reported that it expects the commercial market to grow in 2007, with traditional residential investors looking at the opportunities within the sector.

Julien Holmes, managing director at Crown Mortgage Management, admitted that regulatory changes, both from the Financial Services Authority (FSA) for its residential arm, and Basel II would both have an impact over the next 12 months. He said: “I can see borrower interest increasing over the next 12 to 18 months. I also think that there will be an increase in portfolio sales in the commercial sector. It all depends on the ratings attached, and how quickly and easily this can be achieved. Ratings play a huge part, and the introduction of Basel II will also play a part within the commercial sector in 2007, due to the changes forecast.”

Despite calling for a greater synchronicity between the FSA and the commercial sector, Holmes admitted that full regulation of the commercial market would be a bad move. “There would be so much different regulation to administer and would probably be a step too far,” he explained.

Investment opportunities

Increasingly mortgage lenders seem to be looking at opportunities in the commercial sector. This could be a result of the buy-to-let market continuing to be swamped, therefore pushing investors into looking at other opportunities. With this in mind Commercial First has recently launched a range of investment mortgages, aimed at landlords looking to add commercial property to their portfolios.

Commenting on the launch, Stephen Johnson, sales and marketing director of Commercial First, said: “Eight per cent of all commercial property purchases in 2005 were made by private individuals, and we believe this market alone to be worth £4bn annually. Landlord appetite in the buy-to-let sector remains strong, and investors are becoming increasingly aware of the benefits commercial property can add to their portfolio.

“Total annual returns on commercial property have been nearly 20 per cent in the past two years, and whilst this is predicted by the Royal Institution of Chartered Surveyors (RICS) to slow to around 9 per cent in 2007 – commercial property has consistently outperformed other traditional investments over the last 20 years.”

In the residential sector, the proportion of the market introduced by brokers is rising and is now estimated to be approaching somewhere in the region of 60 to 65 per cent. In the commercial mortgage sector on the other hand, the majority of borrowers are still seeking finance from their main business bank, without realising the variety of commercial products that are now on offer or how much added value a commercial broker can give them.

Johnson adds: “Why can brokers give better value? They have access to specialist commercial lenders that individuals do not, and they are aware of a range of options that individual borrowers often do not realise exist. Brokers are also often in a better position to negotiate a better deal, where possible. They should not only be able to grow their own commercial volumes, they could contribute to the growth of the overall sector. Not a bad outcome for adding bit of lateral thinking to a marketing strategy.

Revenue streams

InterBay has advised residential brokers looking for new revenue streams to consider small commercial mortgages.

It says that brokers can expect to pocket the same proc fee for one deal as it would take them to earn for eight residential deals. Colin Bell, operations director at InterBay, added that aside from the financial rewards, offering commercial mortgages to an existing client base will mean adding an extra string to the business bow.

There are currently 22 million people employed by UK small to medium enterprises (SMEs) and the figure has been steadily growing over the past few years. Most intermediaries will already have these small business owners on their books as residential customers, so this will represent a good opportunity to reach out to a large customer group who need financing for their business premises.

Bell commented: “In the UK today, there is a genuine need for intermediaries to help borrowers source their commercial mortgage. This is true for borrowers seeking to purchase or refinance their business premises. But it is also true for the mass of small business owners who currently lease their business premises because they are not aware that they can borrow money to purchase premises.”

Provider support

Intermediaries with experience of residential mortgages are in a perfect position to work with commercial mortgage enquiries. With a little training and support from a good commercial mortgage lender they can soon expand their business and start reaping the rewards.

Bell continued: “Intermediaries are often put off taking on commercial mortgage business due to some common misconceptions about the length of time and effort they take to process and complete. With such high financial returns at stake, along with the added benefits of offering a multi-faceted service to clients, what broker can afford to ignore the opportunities available to them? Also, if they do not undertake the commercial mortgage another broker will, and they could lose the client for good.”

The area covered by the commercial market is expansive. It covers everything from the small high-street shop to the large corporate buildings and office blocks which provides a massive diversity of borrowers to appeal. By offering a commercial solution intermediaries can enhance the number of solutions they can offer a client and it has been reported that the commercial processing system is becoming easier for intermediaries to get fully involved in.

Lenders are always reassessing and enhancing their offerings while setting up initiatives in the marketplace, whether they are in the form of checklists, dedicated support for brokers keen to break into the sector, or through packagers who can provide a viable option which takes much of the hardship and processing difficulties directly out of the hands of brokers.

Islamic opportunities

While some intermediaries continue to look at the commercial mortgage market with a certain degree of scepticism it has been reported that the next step for the Islamic mortgage market will be the introduction of commercial deals that are compliant with Shariah law.

Keith Leach, senior manager for alburaq, a Shariah compliant lender, stated that the Islamic commercial market was currently untapped and would be the next stage in the development of the quickly growing Islamic mortgage market. alburaq said it planned to enter the market in the near future.

Although he says that it is difficult to predict how big the Islamic commercial market could potentially be, he noted there were already 100,000 small to medium Muslim businesses currently trading

He says: “We receive requests daily for Islamic commercial mortgages. The Islamic community is very entrepreneurial and property is seen as a key part of their investment portfolio. It is acceptable in the restrictions of Islamic law, as it is a tangible asset that fluctuates in profit. The government is keen to see growth in the Islamic mortgage area and has encouraged banks to set up Islamic mortgages.”

Of course this market is very much a specialist area and very much in its infancy but this is also a sentence that has been written about the general commercial market. However there is little doubt that the professionalism, image and profile of the sector has changed considerably in recent years.

There are now an ever increasing number of dedicated commercial providers proving that it has a rightful place in the market. It is a much needed commodity and as the BTL market continues to expand we will see landlords and investors widen their portfolios to encompass the commercial sector. This will have a snowballing effect as lender competition will continue to hot up which will result in real opportunities for intermediaries who are keen to expand their offerings in the sector.