For a broker who has only ever written residential loans, the first tentative steps into commercial mortgages can feel like wandering into a vast, unexplored landscape. However, those who find their bearings will often discover a new world full of opportunity.
Appetite for commercial property investment continues to grow. In July 2024, the value of new business loan commitments for the purchase of property rose to $6.55 billion in seasonally adjusted terms, according to the Australian Bureau of Statistics’ (ABS) most recent Lending Indicators data release. This was a 5.2 per cent spike on the previous month ($6.22 billion) and a whopping 36.1 per cent jump on July 2023, when it was $4.81 billion.
Similarly, the value of new business loan commitments for construction hit $2.92 billion, up 3.8 per cent from June ($2.81 billion) and 76.5 per cent from July last year ($1.65 billion).
While seasonally adjusted data for business loans commitments can be volatile – subject to handfuls of high-value loans – ABS data shows that commercial mortgages are rising in trend terms, too.
By this methodology, for example, the value of new business loan commitments for the purchase of property sat at $6.36 billion in July 2024, a 16.9 per cent increase from July 2023 ($5.44 billion) and the highest value since June 2022 ($6.48 billion).
The trend value of new business loan commitments for construction trod a similar path, rising to $2.62 billion in July 2024, the highest value since January 2020 ($2.69 billion).
Matthew Heinnen, group manager commercial at Liberty Financial, says the non-bank lender has also observed plenty of movement in the commercial property space.
“We’re seeing growing interest in warehousing and professional service properties. This commercial mortgage trend could be attributed to changes in work and lifestyle patterns,” Heinnen says.
“We’ve also witnessed a positive shift toward commercial investment in regional areas with active local economies.”
Sentimental choice
Meanwhile, the most recent NAB Commercial Property Survey, released by NAB Behavioural & Industry Economics, shows the immediate outlook to be optimistic.
In Q1 2024, NAB’s Commercial Property Index – a measurement drawing on surveys of property professionals and real estate metrics plus metrics such as rental expectations, vacancy rates, and market demand – increased 13 points to +7 index points, above the long-term average.
Confidence in commercial property also improved, with the 12-month measure up 12 points to +15 index points and the two-year measure up 11 points to +27 index points.
Barry Saoud, general manager mortgages and commercial at Pepper Money, says urbanisation and population growth have been key drivers of the bounce back in commercial real estate.
“This significant growth potential is enticing savvy residential mortgage brokers to explore other opportunities to support their clients,” Saoud says.
“Australia’s industrial property sector, in particular, is experiencing remarkable growth, characterised by high leasing activity and near-zero vacancy rates in 2023, which has led to rising rents. This growth is closely tied to the escalating demand for warehouse space from online retailers, e-commerce platforms, and postal and transport businesses.”
Fork in the road
All these numbers add up to what appears to be a gilt-edged opportunity for brokers looking to write a broader range of business, particularly as the number of mortgage brokers who are also writing commercial loans is falling. The Mortgage & Finance Association of Australia’s (MFAA) most recent Industry Intelligence Service (IIS) report found that the number of brokers also writing commercial loans dipped for the second successive six-month period.
Around 5,654 mortgage brokers wrote commercial loans in the six months from 1 April to 30 September 2023, according to the MFAA, a 7.58 per cent drop on the same period the year prior (when it was 6,118 brokers).
However, the business these brokers are writing is skyrocketing. The total commercial loan book value of mortgage brokers has never been so high (sitting at a record $78.12 billion in the six months from 1 April to 30 September 2023).
Speaking of the disparity, Cory Bannister, chief lending officer at La Trobe Financial, says, “Broker market share in the commercial property loan space is significantly underweight compared to market share of residential lending, some 74 per cent compared to just 38 per cent in commercial.
“With the commercial mortgage market representing around $300 billion in settlements per annum the opportunity is huge, and we believe the year ahead could provide brokers with an opportunity to make significant inroads in rebalancing this ratio.”
Indeed, MC Finance’s Matthew Chik, named Commercial Broker of the Year at the 2024 Australian Broking Awards, encourages brokers to seize the opportunity, saying the differences between commercial and resi are not as pronounced as some may think.
“The fundamentals are very similar. You need to understand your client, why they’re doing what they’re doing, to present the right information to the bank and get the credit right,” Chik says.
“Brokers should have an understanding of the industry and the market they’re playing in.
“For example, we play heavily in the medical space. So, I constantly upskill myself in the medical area [to understand] how they get paid, how the contract works, things like that.”
Right track
With so much appetite for commercial property, brokers could be bolstering their service offering to clients by entering into this space. But getting up to speed in commercial mortgages needn’t feel like wandering around a desert without a compass.
Many lenders, including Liberty Financial, La Trobe Financial, and Pepper Money, offer a trove of resources (such as training, workshops, and BDM support) to help brokers navigate a path in commercial home loans.
“Many businesses are seeking commercial loans to grow or invest in new property, giving brokers an opportunity to help them achieve these goals,” Heinnen says.
“Diversifying into commercial lending could see brokers expand the range of borrowers they can support, attracting new customers or deepening relationships with current clients.
“Those brokers not exploring diversification could be missing key growth opportunities.”
Bannister expects loan origination levels to remain strong as market conditions improve.
“Our commercial real estate portfolio has continued to perform incredibly well given the market forces at play, and while it is too early to say that the challenges facing the sector are completely behind us, we do believe that conditions have improved and will continue to do so as inflationary pressures recede and confidence is regained in the sector,” he says.
Saoud says that while writing residential and commercial mortgages may represent the road less travelled, it’s also one worth exploring and can make all the difference for a broker’s clients.
“The initial challenge of finding clients might appear overwhelming. However, many residential brokers already have a potential client base; they just need to know how to tap into it,” Saoud says.
“Understanding your clients and anticipating their needs allows you to provide comprehensive services. Any broker can achieve this with the right approach.”
