Commercial lending: cracking the market

Resi loans may be your bread and butter, but that’s no reason to ignore the bottom line benefits of this dynamic sector.

A lack of understanding about the commercial property space is the primary reason most brokers don’t venture into commercial mortgages. This feature article will give you an idea of what you need to know to get started.

Get educated

Gaining a bit of an understanding around how commercial lending works will naturally open up new opportunities.

Having a working knowledge of financial statements also helps a great deal. Most resi-oriented brokers will already have some experience here with lending to self-employed clients.

However, if this is virgin territory for you, speak to your aggregator about ways in which they can help give you a better understanding of the segment.

Vow Financial has been ramping up its commercial offering and recently held its first commercial lending conference in the NSW Hunter Valley.

Commercial lending veteran Glenn Mitchell was appointed as Vow’s head of commercial and leasing in September last year, a newly created position in a group eager to broaden its horizons.

“I’m finding now that lenders are looking at balance sheet lending where, if they are heavy on residential, they are now looking at weighting the balance sheet so that there is more commercial activity,” he explains. “Particularly the stability of the securities. If you look at commercial property, it has been very stable, even through the GFC.”

Vow Financial frequently runs education programs through webinars and professional development days at which lenders talk to brokers about their product offerings.

Education is also a core part of commercial lender Thinktank’s business model. The group’s sales team offers brokers a range of support and services, from deal workshopping to one-on-one coaching and commercial training sessions, seminars and webinars – also carrying approved PD points – and, more recently, how to successfully prospect for and convert deals.

“The focus is on meaningful education combined with start-to- finish deal support in helping brokers who are seeking to best meet their clients’ financial needs, and in turn achieve higher output from their client base and gain additional lift in their business,” Thinktank’s head of sales and distribution, Peter Vala, says.

Finding clients

According to Mr Vala, brokers can prospect through their customer base and identify self-employed business owners and active investors who already have commercial premises that they either own or lease out.

“This can quickly lead to conversations around the potential for re-financing, releasing equity, trading up, investigating the SMSF option or buying instead of renting while interest rates are low,” he says.

“This in turn can then lead to building a wider network of referral partners as brokers engage with other professionals along the way, including accountants, financial advisers and lawyers.”

Once you’ve identified some strong commercial property leads, and have the support of a commercial lender, the benefits to your business will become evident pretty quickly.

“The additional income stream from servicing a client’s broader financial needs can be material and long lasting,” Mr Vala says.

“Building stronger ties with clients also strategically defends against them seeking finance or assistance through other channels. The additional skills acquired and positive impact on reputation often leads to an expansion in a referral network, and in turn produces, new and varied opportunities to consider and convert.”

Customer diversity

The range of clients seeking finance for commercial property is vast. For brokers looking to venture into the broader commercial finance space – including SME funding, asset and equipment finance– business owners will be a significant market for commercial loans.

These SME clients will be either looking to buy, build or upsize premises to house their operations.

There is also a large component of property investors who are drawn to commercial because of the higher yields produced when compared with those of residential investment and they can just as easily be self-employed or PAYG, according to Thinktank’s Mr Vala.

“With housing prices in the major cities pushing ever higher, commercial properties from $250,000 to around $2 million in value are offering some very attractive opportunities,” he says.

SMSF investors

The biggest area of activity in recent years has been inbusiness owners acquiring their premises via their self-managed super fund, due to the long-term tax advantages. Recent positive statements from the federal government about future regulation have also produced a new surge in SMSF borrowing activity.

Thinktank has a commercial SMSF product that enables borrowers to go up to 75 per cent LVR and as far out as 30 years for the term of the loan.

“We can tailor it to meet the circumstances and retirement plans of the SMSF members, which is most important in ensuring alignment with their financial advice and wealth management objectives,” Mr Vala says.

“Borrowing under an SMSF structure for a commercial property, where an associated entity or business is a tenant, can be very effective and attractive for long-term tax management and wealth creation,” he says.

“We specialise in managing the process, compliance and completion involved with these types of structures.”

Regulatory changes

While the status of SMSF loans for residential property is still in limbo, there are currently no changes to the legislation or its interpretation. As a result, SMSF trustees are perfectly entitled to take out finance for the purchase of commercial and permitted residential properties.

Any changes in legislation should not be retrospective, so borrowers and brokers can act with confidence, says Mr Vala.

“Looking ahead, the indications from the government are that SMSF limited recourse borrowing arrangements (LRBAs) will not be banned and it appears probable commercial property will see little in the way of change,” he explains.

“We do anticipate a level of tightening in the residential space, however, in an effort to clamp down on spruiking and other examples of poor lending practices.”

Thinktank has seen lending volumes in SMSFs increase to previous peak levels now with the positive signals from Canberra, and this tends to suggest the market in general is also confident about the outlook.

Broader benefits

Diversification is more than just a buzzword. Adding new revenue streams to your business will help you manage through economic and financial cycles, since varying needs and opportunities can arise at different times in commercial as opposed to residential.

“Becoming a more trusted adviser and financial relationship manager to a client helps to cement existing revenue and promotes new opportunities going straight to the broker themselves rather than anywhere else,” says Mr Vala.

How I brought commercial lending into my business – Jeremy Fisher, director, 1st Street Home Loans

When did you first decide to diversify into commercial finance?

We started offering commercial finance about four years ago. 1st Street was established in 2002 and we initially specialised in residential lending. The demand for commercial lending was growing and we had been outsourcing it, so we decided that it would be better overall if we brought it in-house.

Was it a difficult move?

Commercial lending is a more complex proposition. We had to upskill our knowledge of both the commercial loan process and the commercial finance space, and we also obtained commercial lending accreditations with lenders.

How has your workload increased?

The time required to process a commercial loan is approximately double that of a residential loan and the settlement time is twice as long too. Commercial lending clients generally have higher expectations as they are often experienced and savvy investors.

Was your existing aggregator able to help?

Our aggregator is set up for both residential and commercial lending. We also have an ACL, so we are able to deal directly with lenders.

What advice would you give a broker moving into commercial lending for the first time?

It is important to keep in mind that commercial loans and residential loans are very different from each other. To offer commercial lending requires additional accreditations, a new process with a different timeline, fewer deals and often a different type of client.

What are the opportunities for brokers?

The loan sizes are much larger, so there are opportunities for higher remuneration. Keep in mind that there are fewer commercial lending clients throughout the year. Commercial clients are often ‘stickier’ in that once they have a commercial loan, they keep it for longer periods.

How big is the commercial and business lending space?

It is a huge space and it’s mostly untapped from the mortgage broking sector. Brokers should look at upskilling and gaining the necessary accreditations to be able to offer commercial lending in-house to better service their clients and increase revenue.

The bottom line on commercial borrowing

IMB Bank’s CEO, Robert Ryan, explains how the commercial property market has been tracking and reveals a valuable secret about add-on sales:

How has the Australian commercial property market been performing recently?

The commercial property sector has been relatively stable. We are receiving enquiries for all types of commercial lending, particularly in the SME segment. CBD office tenancies are getting smaller and we continue to see high levels of incentives, such as rent-free periods and fit-out contributions, being offered to secure longer-term tenancies.

With record lower interest rates, there is a real focus on owner-occupied commercial properties, because loan repayments are now often cheaper than rent. Some of these owner-occupied property purchases are in the individuals’ names with the business as a tenant, but increasingly a proportion are purchased through the customer’s SMSF vehicle.

Why should brokers diversify into commercial property loans?

Diversifying into commercial lending allows brokers to provide a full range of services to their existing business clients. Some brokers have referral arrangements in place with other commercial brokers who specialise in this area and are, by design, missing out on extra revenue streams.

Because the commercial facility is normally larger and more complex by nature than normal resi lending, a higher level of expertise is required from the broker, BDM and credit area of the bank. An added bonus is that commercial lending usually leads to a resi product as an add-on sale. IMB’s BDMs will assist the broker in structuring the deal, putting the transaction together and guiding them through to approval and settlement.

What are the bottom line benefits?

Satisfied clients, increased sales, diversified and increased revenue streams.