Commercial Mortgage Market update - 10.1.2011

Author: Steve Olejnik Posted on: 09 January 2011

Sourcing commercial finance will remain challenging as we enter 2011 with the majority of High Street banks still in retreat and acting extremely cautiously, especially around property finance. Lenders such as RBS, Clydesdale, and of course the Irish banks, have started to review and re-price commercial loans and in many cases ask borrowers to refinance elsewhere.

 

We continue to see an upswing in enquiries from borrowers needing urgent remortgages, especially those with residential and commercial investment portfolios. Fortunately, with semi-exclusive access to the likes of Paragon and Aldermore, increasing support from the likes of Barclays and Santander,  and strong relationships with all the other  major lenders, we continue to source alternative finance for many applicants. More is still needed though to ease the flow of credit, especially to start-ups and those owner-occupiers looking to refinance premises having survived a difficult trading period over the last couple of years.

 

We continue to work with lenders new and old to get more products out into the market and I would welcome the views of any borrowers needing to refinance property at the moment. Currently we are arranging finance for the following:

 

Residential Investment Properties

This sector includes “vanilla” buy to let and more complex scenarios including Houses in Multiple Occupation, mortgages for Limited Companies, multi-unit freeholds and, development and refurbishment projects.

 

There a few mainstream BTL lenders picking up the straight forward purchases and remortgages but it is the commercial lenders who are filling in the void with assistance for investments held in a corporate capacity or for the less straight forward assets. The return of Paragon is also a welcome boost for professional landlords with large portfolios.

 

Maximum LTV available for non-standard BTL is 75% but with the commercial and specialist lenders applying quite strict rent cover criteria, investors are having more success in obtaining good terms at 70% LTV and below.

 

There are a few funding options for properties in need of refurbishment before being able to generate an income, with the scale of works required determining the type of lender available. For straight forward tidy-up jobs (new kitchen, bathroom, redecoration etc) there are some decent products available providing up to 70% of purchase price/value with further funds released against end-value post refurb. For heavier refurbishment projects, bridging finance remains a valuable short term option. The key here is getting the property to a standard to produce sufficient income to service the longer term finance required to redeem the bridging finance.

 

For projects requiring planning permission, development finance is available from a handful of lenders. The majority of lenders in this market require the borrower to have some experience in property development and will consider total borrowing on a project to be no more than say 50%-55% of the end value of the site. The developer will be expected to have a level of cash contribution towards the project – typically around 40% of overall costs as a minimum. Interest rates vary drastically from 5% over Base per annum to 1.5% per month and it is therefore essential that any developers looking for finance seeks advice from a specialist broker to obtain best terms.

 

 

Semi-commercial Properties

 

These types of property include shops/offices with flats above.

 

Again there is an improving number of options available for the semi-commercial freehold investment, with maximum LTV at around 70%. Mortgages are based on the applicant’s background and financial position as well as the rental income being generated from the property. The combined rent from all parts will be taken into consideration as well as the length and quality of the commercial lease in place.

 

An average interest rate would be around 5% variable with arrangement fees around 2% to 3%  but as with all commercial mortgages, pricing is generally bespoke and based on the strength of the application.

 

Commercial Investment Properties

 

We are seeing an increasing number of residential investors move into the commercial investment market as they seek to build portfolios and diversify.

 

Finance options are a little limited and a lot depends on the quality of tenant and the length of lease. Borrowing terms will vary between say a 15 year lease to a blue-chip company and say your more typical 3 or 5 year lease to a local trader.

 

The high street banks in general apply quite strict rent cover rules and as a result, the majority of loans sanctioned by the banks are lowly geared and most of the time are sub 60% LTV. Length of lease is also a major factor for the banks and the value and marketability of the property at the end of the lease is key.

 

We now have access to options other than the high street with specialist commercial lenders taking a more pragmatic view on lease length. A surveyor’s opinion on future marketability and rental demand post the end of the lease will be considered as part of the application process. Subject to rental income and quality of the borrower, 70% LTV on reasonable terms is becoming increasingly available for commercial investors.

 

Commercial Owner-occupier/Trading Premises

 

We are starting to see and upswing in enquiries from business owners looking to switch lenders and those considering purchasing new premises to either expand or move away from the uncertainty of renting their trading premises. Property types will include retail shops, offices, industrial units etc.

 

Applications for finance are based very much on the strength of the business and the proprietor. Those businesses that can prove affordability by way of recent financial accounts (last 2 / 3 yrs accounts) have more chance in securing finance with 80% LTV available to financially sound owner occupiers. Those businesses looking for stand-alone finance without the need to switch business banking should expect to see maximum LTVs at 75%.

 

Pricing is dependent on the strength of the application with interest rates ranging from around 2.95% above Base Rate to margins of c5%. Arrangement fees also vary but are typically between 1.5% and 2.5% of the loan amount.

 

Care homes

 

There has been an increasing trend in the last decade for care and nursing homes to be run independently by private individuals and small limited companies, whilst the majority remain under large corporate ownership.

 

Financing tends to be made easier if the property has 40 plus beds, has lift facilities and all the rooms are en-suite, however we can still arrange funding if this is not the case.

 

In general, loan to property value for care homes tend to be between 70% and 75%. The care home mortgage term will be between 20 to 25 years and the rate you can expect to pay in the region of Bank Base Rate + 2.75% to Base Rate + 3.5%. Rates will be determined by the financial performance of the care home and the previous experience of the business proprietor. Lender fees of 1.5% to 2% will apply.

We have excellent experience in the care home mortgage sector and acutely aware of the factors that affect the lending decision, call us for further information.

 

Leisure Industry

The leisure industry covers a number of business premises including hotels, guest houses, public houses, nightclubs, golf clubs and restaurants.

 

Whilst we are arranging finance for a few hotels, in general appetite amongst most of the lenders for the leisure sector is pretty low at the moment. We have received a number of funding requests for guest houses/B&Bs, pubs and restaurants and applications need to be extremely strong to be successful in securing finance. There is also little interest from the banks in lending based on projected income so start-ups are struggling and need robust business plans and a large cash contribution to get a lender interested.

 

 

In summary, liquidity in the commercial mortgage market looks set to remain tight as we start 2011 but if you do require advice and assistance with a commercial mortgage then we will be able to help. Our commercial specialists are all experienced bankers with good relationships with all the main lenders and at a time when criteria and lender appetite is changing all the time, it is important that you seek independent advice on the options currently available.