Will the downward pressure on commercial rates continue?
Commercial lending rates

Will the downward pressure on commercial rates continue?

Increased competition within the commercial lending space has put downward pressure on interest rate margins, one broker has claimed.

The comment is backed up by recent news from Key Commercial Finance, which found that there had been a downward trend in rates for commercial, business and property funding fuelled by the number of new commercial lenders.

The specialist finance broker said it recently received quotes of 0.75% per month for short-term speculative commercial property funding and added that two or three years ago it would have been priced at 1.25% per month.

Are new lenders driving down rates?

“There have been new entrants across many sectors and the increased competition has certainly put downward pressure on the interest rate margins,” said Robert Collins, director at Sirius Property Finance.

Keith Aldridge, managing director at Amicus Property Finance, added: “With an increase in new entrants and a good amount of liquidity in the market, simple economics would suggest a downward pressure on rates. 

“This discussion has been going on for a while now – [and] yes, there are lower rates out there.”

Chris Oatway, director at LDN Finance, said the areas in which it had seen significant pricing reductions were bridging and development finance.

“We have seen many new lenders enter the market, which has put pressure on the more established lenders to reduce their rates to ensure that they continue to maintain their lending levels.”

However, Ludo Mackenzie, head of commercial property at Octopus Property, added: “…Many borrowers continue to value certainty, speed and flexibility over rate alone.

“We have also seen new entrants come in with higher LTV propositions, but seeking higher rates.”

Are there other factors driving down commercial funding rates?

“The global capital markets are awash with liquidity and this hunt for yield is driving competition for assets in most lending classes,” said Matthew Wyles, CEO at Hampshire Trust Bank.

“Obviously we see this impacting in competition for commercial property finance business, as everywhere else.”

Nick Parkhouse, associate partner at EY, pointed out that over the last four years, it had continued to see interest from banks and credit funds keen to lend into the bridging finance sector.

“Inevitably, as these institutions have become comfortable with the credit risk, they have reduced the cost of their financing and so some of what we are seeing in the downward movement of rates for bridging finance is the knock-on effect of this ever-increasing availability of liquidity to the sector.”

Chris Whitney, head of specialist lending at Enness Commercial, felt that demand from borrowers had also increased.

“Investors and small developers have done well out of residential property in recent years, and I think that as they mature, gradually moving into mixed-use opportunities and eventually into commercial property is a natural progression.

“Especially when commercial property can, when structured correctly, have some attractive tax benefits in a climate where taxation on residential investment property has increased.”

Oatway added: “Fintech is certainly reducing costs, reducing risk and increasing efficiency, which allows commercial lenders to price their products more competitively.”

Paul Riddell, head of marketing and communications at Lendy, said: “The sustained low interest rate environment has been a major contributing factor in depressing commercial finance rates, although that has been moderated by the exit of many banks from the market.”

Will the downward trend continue?

“A further interest rate rise by the Bank of England would help relieve the downward pressure on rates, and begin to push them up again,” said Paul.

Nick didn’t expect to see much more tightening of rates from wholesale lenders, adding: “…If anything, we are starting to see a tightening of credit appetite.

“It is, therefore, likely that we will see this trend tail off, though we expect price competition in the sector to continue.”

Ludo added: “I think that the cost of equity has a floor, but there is scope for further rate compression.”

Stephen Brennan, director of credit at ActivTrades, said that there appeared to be no end in sight yet with regards to the emergence of new lenders.

“On the basis that in order to write business there are a number of elements that borrowers will be considering, one of these being pricing, which will inevitably lead to keener rates being made available.”

Whitney felt that as demand for commercial property investment increased, lenders would move into the sector to meet that demand, which would lead to a downward pressure on rates.

“While the Bank of England base rate will be going up sooner rather than later – meaning we see a general increase in the cost of funds across the finance market – I think we will see interest rates on commercial property still fall further within the specialist lending sector, depending [on] how individual lenders are funded.”

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