Commercial mortgages in 2006

As Stephen Johnson, Sales and Marketing Director of Commercial First, stepped up to accept their second award of the evening at the NACFB Annual Dinner and Gala Awards ceremony on 11 November, the frustration of some of their competitors was quite evident. Not only had Commercial First won Commercial Mortgage Provider of the Year but they had also scooped the industry wide trophy for Specialist Lender of the Year.

The existence of these awards is a tangible measure of the transition that the commercial finance industry is going through and the strong showing of a new start lender (albeit lending for nearly 3 years) demonstrates the level of opportunity and emerging dynamism of the whole sector. Stephen Johnson and his colleagues at the ever expanding Commercial First HQ in Brentwood would be the first to acknowledge the strengths of their competitors’ offerings be it based on product, service offering or market coverage.

They too have heard the rumours of lenders moving their tried and tested sub prime models from the domestic and Buy To Let mortgage sectors into the commercial arena to mimic the successful model that launched Commercial First into the market in late 2002. It was hardly surprising that Stephen Johnson announced the roll-out of “Choice” in September that extended their range into the near prime commercial sector, long seen as the preserve of the High Street Banks and commercial lending divisions of the Building Societies. The former woke up to the threat of competition 2 or 3 years ago and RBS/NatWest even have “Hunter Managers” with a clear focus on pulling in new business whilst developing a clear corporate strategy of intermediary development with specialised groupings such as The National Association of Commercial Finance Brokers (NACFB). HSBC has recently declared that its intermediary terms will only be granted to NACFB accredited brokers – a step that clearly recognises that commercial finance intermediation requires an additional skill set beyond the other mortgage sectors.

The specialist lending divisions of the Building Societies have generally focused on a tighter product range than the Banks, with Norwich and Peterborough moving up to 80% LTV on newer build offices and warehouses in 2004.  Additionally Norwich & Peterborough now offer a VAT Bridge product to offset the unwelcome carry costs of the VAT element on commercial property purchase for anything up to 90 days post completion. Coupled with the first current account commercial mortgage and a package of incentives for “green” business, Robert Lankey at Norwich & Peterborough has justifiably won other awards in the past 2 years. 

Grahame Taylor and his team at Skipton have also won a share of the spoils in recent years, with their use of pricing as a weapon being about as sharp as it gets. A healthy dose of laxative is also applied to both the arrangement and the legal fees making the Skipton an attractive option on mid sized transactions where “capping” fees is not the norm. The larger property investment transactions continue to be well served by the likes of the West Bromwich, Britannia and Nationwide Building Societies. The latter now access money direct from the capital markets which allows them to price the margin as keenly as any investment bank and the ability of the others to deliver large loans either on their own account or by syndicating loans across 3 or 4 building sociteieas has often caught other lenders unawares.  

The gap in the market brought about by the decline of the finance houses in the late 1990s was filled by The Abbey whose reach now extends beyond business value based finance into prime commercial mortgages and a willingness to challenge for multi million pound transactions in sectors where it feels confident. Backed by a strong service proposition and expanded numbers of well trained and motivated field managers, it is no surprise that Mark Stevens has an almost evangelical zeal for spreading the message of choice and service at every opportunity. The impact of Abbey’s new ownership by Banco Santander has yet to be fully felt but recognition of this position must be on the cards at next year’s awards.

The really large ticket lending that is the preserve of the investment banks with their “conduit programs” and  the specialist divisions of the High Street banks does not often appear in the intermediary market but this sector too is changing as securitisation drives down funding costs. Securitisation is the key to freeing up competitive pricing, as Commercial First continues to demonstrate with their 3rd programme completed this summer, but all this expanding choice and rapidly changing lending parameters with price only one element does pose risks for the unwary. The identification of the lender to finance on a particular type of building to a business trading in a defined sector is the start of the process where factors of loan covenant, the provisions of directors guarantees and the relative merits between dentures and fixed and floating charges add to the advisory process in addition to loan to value, loan term and pricing.

This is why the NACFB is seeking to raise professional standards through its education programme and has now teamed up with the IFS to use CEMAP as a launch pad to commercial mortgage modules so that IFAs in time can effectively handle commercial finance enquiries. In the interim many will need the support of specialist commercial packagers and Andy Young of The Business Mortgage Company (TBMC) which was a founder member of NACFB has seen these trends in the market “Our commercial applications in October were 64% higher than our previous highest month and our recent SESAME Roadshows drew a very high level of interest from the members. We are talking to networks who want a service to drive revenue without compromising their IFA members’ focus from core life and pension business channels. A particular concern for some is identifying a commercial packager that offers a genuine whole of market option and who recognises that commercial transactions are bespoke solutions and not part of a volume process operation”.

Commoditisation within the commercial mortgage sector is set to expand and improvements to offerings will continue to be driven by specialists such as TBMC.  New market entrants and increased product and service innovations amongst current players in 2006 will keep the sector evolving at a pace undreamed of 5 years ago.

The concerted drive to increase the knowledge base in the commercial market, as championed by the NACFB, will accelerate the day when business borrowers look to the intermediary sector with the same confidence as they would for their domestic mortgage.