The rebirth of the commercial mortgage market

The rebirth of the commercial mortgage market


Stephen Johnson, industry expert and sales and marketing director for Commercial First, has given Bridging & Commercial his views on the evolution of the commercial mortgage market:  

These days there are no game-changing lenders in the market – in reality the sector is dominated by the clearing banks. However, roll back to pre-crunch and you had a healthy market in which building societies, non UK banks and specialist lenders all provided a competitive environment.


Today this tension does not exist, and whilst there are market participants on the periphery, the sector desperately needs a realistic alternative. This alternative may provide a degree of flexibility on criteria, but its real value would be starting to challenge the mindset of the institutions that they can cherry pick applications.


Borrowing rates are now on average 3.5% to 4% over base (Bank of England), compared with previous margins at 1% - 2% over base, and development funding has become particularly scarce and expensive. Mezzanine finance has all but disappeared as the providers of such finance can now achieve their premium margins on lower risk transactions!


I do think smaller privately funded lenders will grow their market share and indeed more will emerge. Whilst mainstream lenders maintain the tight grip on supply, the market will bear some of the premium margin facilities being introduced. This window will be temporary as a functioning market would render the products uncompetitive. The amount of this funding will need be sufficient to provide the necessary market competition, but it will provide alternative funding and, vitally, income potential to advisors.


Given these continuing market conditions, what can broker firms do to give themselves the best chance of generating sales and, more importantly, income?


One key action is for commercial brokers to work their existing clients harder and identify the other needs that exist within their business or personal lives, rather then relying on just one product. IFA’s have adapted to the market conditions better than mortgage advisors, because they have other services and products to fall back upon. There is a very clear lesson here.


My advice to the commercial finance intermediary is simple – keep the costs down to a minimum, look to add as many non-traditional products to your proposition as you can and invest some time in building a customer database that will enable you to communicate and understand the needs of your clients. In this environment they will be working hard on something within their business, and given prevailing conditions will need the service of an intermediary now more than ever.


We are practising what we preach at Commercial First as we recognise the need for our own business to evolve. Consequently we have launched a commercial broker partnership – Commercial First Partners (CFP) - to complement our future lending activity. The partnership brings together a national group of professional brokers, consolidating activity to create a volume distributor of commercial property and business finance products. Our partners are supported by central marketing; IT and sales teams as well as field based development managers. 


We have established relationships with several lenders and providers to offer a range of products - not all of which are dependent on credit to make a sale. For example, we can give brokers access to business finance planning services, including maximising use of tax effective services such as capital allowance planning.


Commercial First remains 100% committed to a return to lending. We are more convinced than ever that an intermediary facing lender can fill a significant void in the market. As ever the key is accessing the funding structure that works in the new world. There are signs of a renaissance in the securitisation market, and whilst this is currently restricted to residential assets, it is a necessary start. As with the need for advisors to diversify and mitigate risk, we will also need to operate a more diverse funding model. Our ambition and desire remain undiminished, and the progress continues.

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