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Commercial Watch Episode 3 | Understandable Wariness

Commercial Watch Episode 3

Commercial watch Episode 3


In today’s Commercial Watch Episode 3, the discussion is on the commercial property sector.  Compared to the flourishing mortgage market segments, the commercial property sector faced setbacks during the pandemic. The prevalence of vacant offices, shuttered pubs and restaurants, and limited retail activities made lenders apprehensive about venturing into this market. Surprisingly, the least appealing commercial enterprises, such as takeaways, emerged as top performers.

Amidst the challenges, a window of opportunity opened for discerning business owners and commercial property investors in the Commercial Watch: Episode 3 economic landscape. The dip in property prices created a favourable environment for acquisition, especially for those equipped to navigate the uncertainties of lockdowns until normalcy returned.

However, securing funding for such ventures proved intricate due to the mismatch in lenders’ risk appetites. During this period, caution and strategic planning were paramount for those contemplating entry into the commercial property market.

Navigating through the intricate financing landscape in our Commercial Watch: Episode 3 on the commercial property market required a delicate balance. The dip in property prices, highlighted in this edition of Commercial Watch: Episode 3, created a favourable environment for acquisition, especially for those equipped to navigate the uncertainties of lockdowns until normalcy returned.

However, securing funding for such ventures proved intricate due to the mismatch in lenders’ risk appetites. During this period, caution and strategic planning were paramount for those contemplating entry into the commercial property market.

Commercial watch Episode 3 | There is still reluctance around retail and hospitality

Consider the case of one of our valued clients operating a successful long-term manufacturing enterprise. This company faced challenges when attempting to refinance its warehouses and offices, securing only a 60% loan-to-value ratio. The goal was to capitalise on a lucrative new income-generating contract. However, circumstances such as diminished lender interest in the industrial sector and stricter criteria posed significant obstacles. In our efforts to support the client, we strategically employed commercial bridging solutions. The key to success is ensuring a guaranteed exit strategy by strategically selling portions of the owned land for development purposes.

This case highlights the importance of thorough consideration before committing to agreements, especially in dynamic markets where financing conditions can fluctuate. It underscores the need for creative solutions and strategic planning to navigate challenges and capitalise on opportunities in the business landscape.

Commercial watch Episode 3 | Mixed experiences

As the high streets witness a resurgence in activity, with consumers flocking back to pubs and restaurants, it prompts a closer examination of the renewed interest among lenders. Conversations with our team of commercial mortgage advisors have revealed diverse perspectives.

One notable case involves a dental surgery boasting robust financial performance, which faced rejection for capital raising during the lockdown period from a prominent high-street commercial lender. The underwriter’s rationale was a reluctance to endorse additional equity infusion during what was perceived as an unfavourable economic climate. Interestingly, the same lender has now shifted its stance, expressing confidence in this particular dental surgery’s prospects. However, it maintains a cautious approach when it comes to other sectors.

This shift in attitude raises questions about the evolving dynamics within the lending landscape as economic conditions fluctuate. It underscores the importance for businesses to carefully assess the lending environment before committing to any agreements, especially in the current climate where uncertainties prevail.

Commercial watch Episode 3 | Ironically, one of the least attractive commercial businesses, takeaways, became one of the best-performing

The overall inclination to lend seems to return, albeit at a measured pace and with discrepancies among lenders and sectors. While certain lenders remain highly engaged through the government’s Recovery Loan Scheme, the revived appetite for lending is predominantly channelled into this program.

Consequently, other lending avenues are constrained, as the scheme, backed by 80% government support, understandably draws lenders’ focus due to its risk mitigation features.

Despite the broad resurgence, the financial landscape remains dynamic, with the Recovery Loan Scheme overshadowing other lending opportunities for some institutions. This intricate balance underscores the nuanced nature of the current lending environment.

Commercial watch Episode 3 | Covid caution

Many lenders are now scrutinising loan applications with a keen focus on assessing how businesses weathered the storm of Covid-related challenges. The impact of lockdowns and the strategies companies employ during these periods are key considerations in the underwriting process. Lenders are interested in the past and looking ahead to understand the business plans in the post-pandemic landscape. Moreover, lenders take a cautious approach, with concerns lingering about the potential of future lockdowns.

Gareth Norman
Gareth Norman, Commercial and Development adviser

Connect specialist commercial and development adviser Gareth Norman says: “The commercial property market has undoubtedly seen some relaxation since Covid rules were eased. There is still quite a bit of reluctance around sectors that were hardest hit by the pandemic, such as retail and hospitality. Office space is an ongoing challenge, with so many business models having changed through lockdown, and therefore, it is unclear how these security assets will perform.”

Norman further elaborates on the evolving dynamics, indicating that despite the easing of COVID rules, reluctance persists, particularly in sectors hit hardest by the pandemic. Given the changes in business models during lockdowns, the uncertainties surrounding the performance of office spaces continue to pose challenges for lenders in their underwriting processes.

Commercial Watch Episode 3 | As the high streets fill up again and consumers return to pubs and restaurants, it’s interesting to see if lenders’ appetites return, too.

“Lenders’ primary focus is on the owner-occupier space, where the underwriters remain pragmatic about assessing financial performance through the pandemic. However, one lender will entertain a 100% LTV facility for the strongest trading businesses, with an aggressive five-year pay-down period, so innovation appears to be returning.”

He adds: “Property development is also experiencing an interesting surge. However, because of Brexit, there is a shortage of materials, and therefore build costs have increased. How this will affect development projects is unclear as it requires either smaller developer profits or higher selling prices.”

Lenders, such as Allica Bank and Shawbrook, have been lending throughout COVID-19 and continue to show a real appetite for commercial. This will put them in good stead with advisers who have found them a reliable lending source and have built relationships and familiarity with them.

Commercial watch Episode 3 | Property development is experiencing an interesting surge

It is good to see returners such as Together and Cynergy in the market. Also positive are the launches of new lenders, like Recognise Bank, with longer-term plans to shake up the market. However, Recognise remains cautious for the moment and is restricting its distribution through limited partners until more confidence builds in the market.

Connect for Intermediaries commercial director Kevin Thomson predicts a cautious return to pre-pandemic lending for the rest of the year. Subject to no further setbacks, he is confident of a much better lender market in the first quarter of 2022.

We’ve reached the end of our publication on “Commercial Watch Episode 3 | Understandable Wariness In Wake of an Extraordinary Pandemic.” Until next time, stay “Connect!”

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