What areas will lenders not touch?

Experience and nervousness have been highlighted as two reasons why some lenders are reluctant to lend in certain areas of commercial finance...

Research by Savills recently revealed that investor demand for shopping centres continued to be strong and it was expected to see further yield over the remainder of the year.

Nick Hart, of Savills Shopping Centre Investment, said: “We expect to see nearly £6.5bn of shopping centre investments traded this year.”

However, during Savills’ Financing Property presentations, it was revealed that there was a lot of competition in the commercial lending sector with over 150 new entrants to the market in the last three years.

“However, the majority of these lenders are focusing on similar segments of the market, and we believe that good opportunities still exist in providing finance for less competitive areas such as development, secondary assets, regional portfolios, alternatives, and smaller-ticket investments,” said Savills.

These findings were backed up by research from the Royal Institution of Charter Surveyors in its commercial property market survey which asked surveyors their views on the state of the commercial property market.

Jason Rawson, of Trevor Dawson & Company in Lancashire, said: “Lenders are still very cautious. Confidence is growing slowly although smaller businesses are still very aware of increased costs.”

Brokers can be on the receiving end of lenders reluctant to lend on commercial property and Samantha Williamson, BDM for Positive Commercial Finance, said they saw lenders being very cautious to lend to smaller house builders.

“The main two reasons for loans being turned down are lack of enough cash contribution to the overall land and build cost by the customer, and lack of recent, successful experience of building a similar scheme by the customer,” said Samantha.

Samantha said fortunately there were plenty of alternative finance lenders out there with a much more flexible approach.

“As long as the costs look realistic, the location and demand is good, and suitable professionals and contractors are being used, then they are prepared to lend against the Gross Development Value (ie the end values of the property), with a lower contribution from the customer,” added Samantha.

Russell Martin, Managing Director of Finance 4 Business, felt common sense had returned to broking and in the right hands funds could be sourced for the most sensible deals.

“Established lenders have demonstrable track records of lending against various product types,” said Russell.  

“As economic cycles evolve, so does a lender’s proposition, thereby streamlining their offerings to products and security types they are comfortable with and as is the acid test on any type of lending, their success in recouping funds lent in the event of non-performance from the borrower.

“This in itself presents opportunities to newer lenders seeking market share as many carve out lending opportunities by serving niche areas.”

Zed Lorgat of JM Financial meanwhile, found lenders were reluctant to lend on anything which was slightly obscure.

“Unless a lender can see clear exit on a bridge or unless a commercial lender sees long term affordability as well as solid borrower profile, it is highly unlikely for them to lend on anything like a school, hospital, church or religious institutional property, community centre, or even care home type of entity,” said Zed.

“The reasons can be many however the main concern for a lender is the underlying dreadful thought of default, thus being drawn in to unnecessary adverse publicity.” 

So what do lenders themselves see as the reasons behind them being reluctant to lend on some commercial projects?

Ashley Ilsen, New Business Executive for development lender Regentsmead, said it could often vary from lender to lender.

“Every lender has their own sweat spot and likewise particular areas that make them nervous,” said Ashley.

“For example, supposedly residential schemes that could arguably be perceived as a commercial proposition, such as care homes, student flats and HMOs, can be a sticking point.”

Ashley also highlighted areas which sometimes put Regentsmead off, saying they preferred to lend on low unit numbers, and so when approached with larger schemes they tried to break them down into phases in order to test demand in the area.

“We will always look to find any way to fund a project rather than just saying ‘no’ and this is the advantage of being a specialist in development finance,” said Ashley.

“This has allowed us to take on projects that most lenders would baulk at, such as substantial barn conversions, holiday lodges on a golf course and even a house on stilts on an island in the Thames.”

Bob Sturges, Head of Communications of Omni Capital, agreed with Ashley and felt lenders should stick to the areas they knew best.

“Many niche sectors offer enticing opportunities - and even more enticing returns - but to engage successfully usually requires specialist skills and knowledge absent from most lenders' toolkits,” said Bob.

“As a leading provider of funding for residential projects, we tend to steer clear of commercial and public sector opportunities because they fall outside our comfort zone. But there are exceptions.”

Bob said that Omni Capital had recently provided a multi-million pound ‘drawdown’ funding line to a developer of care homes.

“Whilst not natural territory for us, we were persuaded by the impressive credentials of our borrower and the logic of their proposal,” said Bob.

"That we were able to show such flexibility is, I believe, testament to one of the great strengths of the alternative lending sector.

“But flexibility should walk hand-in-hand with prudence, and lenders should generally stay true to the lending they know and do best."

Jonathan Sealey, Chief Executive of Hope Capital, said they were reluctant to lend on ‘spade in the ground’ developments as if things didn’t go to plan it was much harder to repossess and dispose of a piece of land halfway through the installation of foundations.

“We also don’t lend on owner occupied residential properties as not only are we not regulated to do so at this time, but also because we would never want to be in the situation where we would need to repossess and evict somebody from their own home,” said Jonathan.  

“Another type of property we wouldn’t lend on are petrol stations due to the high level of contamination on the land, and the costs associated to the remediation of this.”

Jonathan felt there were a number of reasons why lenders didn't lend on some types of projects.

“Lenders can be reluctant to lend on various different projects for their own reasons, may that be a set lending criteria dictated by their institutional funders, which Hope does not have, or they simply want to ‘stick to their knitting’ and lend only on projects they are comfortable on,” concluded Jonathan.