Unlike other areas of the mortgage market, which have boomed, commercial property has suffered during the pandemic. Empty offices, closed pubs and restaurants, and restricted retail left lenders feeling very nervous about lending in this market. Ironically, one of the least attractive commercial businesses, takeaways, became one of the best performing.
However, for the right business owners and commercial property investors, with prices low it became a good time to consider acquiring commercial property, particularly for those who had the resources to ride out the lockdown periods until things returned to normal. But obtaining funding for these acquisitions was not straightforward because lenders’ risk appetites did not correlate.
“There is still reluctance around retail and hospitality”
For example, one of our clients, with a thriving long-term manufacturing business, struggled to refinance its warehouses and offices at just 60% loan-to-value to take advantage of a substantial new income-producing contract. This was due to reduced lender appetite in the industrial market and tightening criteria. We managed to assist the client by using commercial bridging, but only because of a guaranteed exit by selling some of the land owned for development.
Now that the high streets are filling up again and consumers are returning to pubs and restaurants, it’s interesting to look and see if lenders’ appetites are returning too. I spoke with some of our commercial mortgage advisers and received mixed feedback.
A dental surgery with strong trading accounts was declined for capital raising during lockdown by a high-street commercial lender. The underwriter felt it was not a good time to raise further equity. That same lender is now happy again with this scenario but still very cautious towards other sectors.
“Ironically, one of the least attractive commercial business, takeaways, became one of the best performing”
Appetite to lend in general appears to be returning, but slowly and not for all lenders or sectors. Some lenders are still very busy via the government’s Recovery Loan Scheme; so, even with renewed appetite, this scheme is taking up most of their resources and not leaving much room for other lending. As this loan is 80% backed by the government, you can understand why lenders would concentrate their efforts in this way, from a risk point of view.
Other lenders are underwriting with a focus on the impact Covid may have had on a business. How did the company manage during the lockdowns? What are the business plans? Lenders are then underwriting with caution; for example, with one eye on the possibility of another lockdown.
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.
“As the high streets fill up again and consumers return to pubs and restaurants, it’s interesting to see if lenders’ appetites return too”
“The primary focus for lenders is towards the owner-occupier space, where the underwriters remain pragmatic about their assessment of 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 not entirely clear as it requires either smaller developer profits or higher selling prices.”
There are lenders, such as Allica Bank and Shawbrook, that have been lending throughout Covid and continue to show a real appetite for commercial. This will stand them in good stead with advisers who have found them a reliable source of lending and have built relationships and familiarity.
“Property development is experiencing an interesting surge”
It is good to see returners to the market, such as Together and Cynergy. Also positive are 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.
Credits: Liz Syms is chief executive of Connect for Intermediaries