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SECTOR REPORT: COMMERCIAL MORTGAGES
While residential property demand may be cooling at the moment, the appetite for commercial property online continues to drive upwards. In this sector report, partnered by Thinktank, Annie Kane takes a look at commercial property and mortgage demand
BY ANNIE KANE
Commercial property is back with a bang. After a momentary blip (when the COVID-19 pandemic first began), demand for commercial property has been skyrocketing in the past year.
National vacancy rates for commercial real estate have dropped to a record low (and are now among the lowest on record globally), at around 0.8 per cent, according to the commercial real estate services company CBRE Australia.
The chronic shortage of supply in the Australian market – and delays to new development construction caused by both weather and supply chain disruptions – have made commercial property a hot commodity. Businesses across Australia have been out in record numbers fighting over a smaller pool of property – leading to increased commercial rents and increased commercial property values.
According to the Australian Bureau of Statistics, while commercial mortgage data can be volatile – the general trend for lending for commercial property is on a fast trajectory upward.
Take a look back to before the pandemic began, and approximately $5 billion of new commercial mortgages were written each month. After a dip in volume during the first few months of 2020 (when the COVID-19 outbreak came to Australian shores and businesses came to a standstill in lockdowns), demand for commercial property came roaring back to life.
Indeed, in the past year, the monthly figure for new commercial mortgages hasn’t dropped below $6 billion.
The ABS’ Lending Indicators report for May 2022 (the most recent data at the time of writing), shows that in, seasonally adjusted terms, the value of new loan commitments for the business purchase of a property rose 19.5 per cent in a month to $7.24 billion.
Looking at the figure compared to the year prior, this was up a whopping 51.4 per cent.
According to non-bank lender Thinktank, which specialises in commercial mortgages, despite the challenging economic conditions putting pressure on the market, there has been continued interest in both commercial property purchases and refinances.
According to Thinktank’s general manager, partnerships and distribution, Peter Vala, and director Per Amundsen, industrial is “the stand out” property type, with this sector having been on an upward trend in recent months in all capitals as well as some regional areas.
“In other sectors retail and office remain stable, with residential hardest hit and currently in decline. To this point we have not experienced any fire sales of commercial property,” they tell The Adviser.
“While it is still very early to see any key changes to the property cycle, it should be remembered that not all commercial property responds to market changes in the same fashion as residential. Our current outlook and forecasts point to commercial property being able to ride out the waves of a volatile market, with some asset classes stabilising and others rising.”
With a changing interest rate and economic environment, commercial property may face a slowing in growth, but it’s expected that this won’t impact the sector in the same way as it has residential property.
Indeed, Thinktank outlines that, in many cases, interest rate changes would have already been factored into commercial leases that generally hold CPI or a percentage rate increase as part of their terms, which should stave off or reduce any major loss in value.
“In saying this, the area of real impact could be if economic conditions see an increase in business failures and in turn a rise in vacancy factors, placing property values under added downward pressures,” the duo said.
With commercial property being so attractive and in demand, brokers are also increasingly being called upon to help businesses navigate the commercial mortgage space – and commercial finance as a whole.
Indeed, the Mortgage and Finance Association of Australia (MFAA) revealed that in its most recent Industry Intelligence Service Report (IIS), a record number of brokers are now writing commercial loans, with a new record value of settled commercial loans also being reached.
The MFAA report showed that the total book value of commercial lending for mortgage brokers writing these loans through their aggregator panel continues to grow, reaching a record high of $54.19 billion.
Period-on-period, the commercial book value increased by $1.69 billion, while the year-on-year value increased by $5.28 billion or 10.8 per cent.
For new brokers looking to write a commercial mortgage for the first time, the key to success is leaning on specialists who know the sector inside out. The most important tip that Thinktank offers brokers entering this space for the first time is to have “at least two or three trusted business development managers or relationship managers in their corner; supporting them from an education, workshopping and funding of transaction perspective”.
For commercial property, which is a very different beast to residential loan writing, having experts on hand to work through transactions to help a broker understand the basics as well as explore new concepts and solutions in commercial lending is paramount.
Lenders that specialise in this field, such as Thinktank, will also provide regular education sessions designed to build the brokers’ knowledge and confidence in writing commercial mortgages.
“Now is the ideal time for brokers to draw on the vast experience of Thinktank’s RM team, with many having navigated cycles of changing interest rates, business conditions and credit requirements,” Mr Amundsen and Mr Vala conclude.
“When faced with challenging environments like this our [RM’s] expertise and guidance is invaluable, especially for those brokers new to commercial lending.”
A WORD FROM THINKTANKTHINKTANK IS a 100 per cent broker-facing business with no direct-to-customer distribution networks. Our business has been built on the strong relationships we have forged – and continue to forge – with brokers.
We exist to help brokers grow their business through providing the resources, guidance and sound solutions to enable them to meet their clients’ financial needs. This ethos has seen our broker partner network continue to grow year-on-year, and is why brokers new to Thinktank generally become repeat users of our services and products.
Per Amundsen
director
Thinktank
Peter Vala
general manager partnerships & distribution
Thinktank
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