Resilience in commercial lending
There could be significant opportunities for brokers across many areas of commercial lending in the year ahead – and non-banks are more than willing to help
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PARTS OF the commercial lending market appear solid, despite uncertainties in the broader economy. Areas that brokers are well positioned to capitalise on include opportunities in the industrial sector, as well as to take advantage of revaluations, the impact of rising rates on major banks' lending practices, and growth in self-managed super funds.
To be sure, the possibility of further rate rises from the Reserve Bank of Australia looms and may act as a damper on markets.
“[This] may result in reduced borrowing capacity for buyers and increased challenges in meeting serviceability requirements for existing borrowers unless proactive measures are taken,” says Peter Vala, general manager for partnerships and distribution at Thinktank.
“However, despite these potential developments, the commercial property market has continued to demonstrate remarkable resilience, particularly in the industrial sector where property values have tended to increase further while vacancy rates have declined.”
Capacity in the industrial property market on the eastern seaboard has been declining for nearly three years now, and demand remains strong. According to Frank Knight Research, industrial vacancies hit a record low of 444,681 sqm in Q1 2023, representing an 82% drop in availability since late 2020. The intense competition among tenants for limited space is causing year-on-year rental growth of nearly 40% in the tightest market of Sydney.
Cory Bannister, chief lending officer at La Trobe Financial, explains why more commercial clients are likely to shift to non-banks as turbulence increases.
“A rising interest rate environment can often cause headaches for commercial borrowers, particularly if they have ongoing review clauses and covenants attached to their loans, a common feature of commercial loans provided by the major lenders,” he says.
“Each year, and in some cases more regularly, key commercial loan ratios are reviewed for compliance.”
“We’re seeing an increase in SMSF limited recourse borrowing arrangements for purchase and refinances, and our recent policy changes further address this demand,” Vala says.
“With no liquidity requirements or minimum net asset conditions, we’ve been attracting an increasing number of customers who are also taking advantage of our ability to use projected concessional and non-concessional contributions for servicing, especially when the fund is newly established.”
SMSF growth is also being driven by more people managing their own financial affairs, especially at a time when some superannuation returns are not meeting customer expectations.
As those in pockets of the Australian business community have more difficulty in keeping up with payments, maintaining adequate cash flow is another factor supporting broker activity in commercial lending.
“Most brokers are actively striving to help optimise their clients’ cash flow,” Vala says.
“Brokers are focusing on reducing monthly expenses for their clients by helping them consolidate debts, extend loan terms, or access equity to maintain a sufficient cash reserve for unforeseen events or to take advantage of new opportunities.”
The latest Fifth Quadrant SME Sentiment Tracker shows that 44% of small to medium-sized businesses that require funding over the next three months need it for working capital, 25% need it for purchasing plant or equipment, and 20% plan to use funds to venture into new markets.
RBA data shows a sharp increase in lending to SMEs across all lenders over the last few months, against a small fall in lending to large businesses on a same-month comparative basis.
With rents at commercial properties rising faster than a speeding bullet, more business owners are moving to purchase a commercial property to accommodate their operations. An increasingly popular vehicle to make these purchases through is a commercial SMSF loan.
“We have been experiencing an increase in SMSF lending for self-employed borrowers who are seeking to acquire commercial properties for occupation by their own businesses, or refinancing out of institutions that no longer offer this product type,” Vala says.
“Of the SMSF transactions we have financed, approximately 80% are commercial in nature and are used to acquire a property for the fund members to locate an associated business as an arm’s length tenant.”
Major banks pulled out of the SMSF area several years ago, making non-banks like Thinktank and La Trobe Financial the only game in town. SMSF arrangements for commercial property purchases are elbowing into a market once dominated by more traditional methods such as special purpose vehicles or trusts, and non-banks are actively refining their offerings in the area to attract custom.
Thinktank is an independent non-bank financial institution specialising in the provision of commercial-property mortgage finance up to $4m and residential-property mortgage finance up to $2m in the Australian self-employed, PAYG and SME sectors. Since 2006, Thinktank has provided over $6.5bn of commercial, residential and SMSF lending solutions, which have enabled thousands of borrowers to achieve their goals of acquisition, refinancing and equity release. Thinktank offers a range of lending solutions, including Full Doc, Mid Doc (Alternate Income Verification), Quick Doc and SMSF loans.
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“As we would expect in this environment, we are observing an increase in equity release and refinances as brokers work with their clients to help improve their cash flow position and take advantage of property-related opportunities,” Vala says.
Cory Bannister
La Trobe Financial
Industry experts
Cory Bannister is a senior vice president and chief lending officer at La Trobe Financial. He has a rich understanding of both the loan origination process via the third party channel, as well as the approval and settlement of institutional and retail loans. Bannister’s portfolio management experience extends to the selection and allocation of assets for multiple wholesale mortgage portfolios in excess of $1bn. He has been responsible for the management, review, risk profiling and audit of wholesale asset pools, and has had conduct of the relationships with substantial wholesale and retail investors, with responsibility for overseeing related reporting.
La Trobe Financial
Cory Bannister
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Cory Bannister
La Trobe Financial
Matthew Porch
Aquamore
Industry experts
Cory Bannister is a senior vice president and chief lending officer at La Trobe Financial. He has a rich understanding of both the loan origination process via the third party channel, as well as the approval and settlement of institutional and retail loans. Bannister’s portfolio management experience extends to the selection and allocation of assets for multiple wholesale mortgage portfolios in excess of $1bn. He has been responsible for the management, review, risk profiling and audit of wholesale asset pools, and has had conduct of the relationships with substantial wholesale and retail investors, with responsibility for overseeing related reporting.
La Trobe Financial
Cory Bannister
Peter Vala has extensive experience in residential, commercial and development finance. As Thinktank’s general manager for partnerships and distribution, he specialises in strategic implementation, leads the Thinktank relationship manager team and works closely with brokers and aggregators.
Thinktank
Peter Vala
Brokers stand to gain from this dynamic as borrowers look to the less rigid options available at non-banks for financing commercial property.
La Trobe Financial is seeing an uptick in this type of business of late. “We are finding an increasing number of brokers turning to us for assistance for ‘set and forget’ commercial property loans, particularly as our maximum loan size of $25m means we are one of a few non-bank lenders able to stretch to assist blue-chip commercial property owners,” Bannister says.
Cory Bannister
La Trobe Financial
Industry experts
“The commercial property market has continued to demonstrate remarkable resilience, particularly in the industrial sector where property values have tended to increase further while vacancy rates have declined”
Peter Vala, Thinktank
Indeed, major lenders have a whole host of regular and ongoing review clauses and covenants, and these can catch up with commercial borrowers when rates rise quickly. Other factors include the revaluation of properties to test LVR thresholds; and reviews of borrowers’ debt-to-income positions.
“All of these ‘tests’ are likely to come under pressure in the current economic environment, which may mean commercial borrowers will need to seek alternatives,” Bannister says.
“Who better to help navigate that transition than brokers? This is where we see significant opportunity in the year ahead.”
Partly due to these tighter lending rules, an increasing number of brokers are seeking assistance from non-banks like La Trobe Financial for so-called ‘set and forget’ commercial property loans.
“Our maximum loan size of up to $25m, and no annual reviews on loans, means we are one of a few non-bank lenders able to stretch to assist blue-chip commercial property owners,” Bannister says.
At the same time, quarterly data from Equifax shows that overall business credit demand dropped 1.3% in the three months to June, suggesting a complicated picture of large borrowers rationalising, smaller businesses seeking more funding to help get through a period of weaker consumer spending, and more people starting to think about borrowing conditions after peak rates.
Cory Bannister is a senior vice president and chief lending officer at La Trobe Financial. He has a rich understanding of both the loan origination process via the third party channel, as well as the approval and settlement of institutional and retail loans. Bannister’s portfolio management experience extends to the selection and allocation of assets for multiple wholesale mortgage portfolios in excess of $1bn. He has been responsible for the management, review, risk profiling and audit of wholesale asset pools, and has had conduct of the relationships with substantial wholesale and retail investors, with responsibility for overseeing related reporting.
La Trobe Financial
Cory Bannister
Peter Vala
Thinktank
Peter Vala has extensive experience in residential, commercial and development finance. As Thinktank’s general manager for partnerships and distribution, he specialises in strategic implementation, leads the Thinktank relationship manager team and works closely with brokers and aggregators.
Thinktank
Peter Vala
Peter Vala
Thinktank
Peter Vala has extensive experience in residential, commercial and development finance. As Thinktank’s general manager for partnerships and distribution, he specialises in strategic implementation, leads the Thinktank relationship manager team and works closely with brokers and aggregators.
Thinktank
Peter Vala
Barry Saoud joined Pepper Money in July 2021 as general manager, mortgages and commercial lending and is responsible for its strategic direction and operating performance across product, credit and settlements sales functions for Australia and New Zealand mortgages, commercial loans, personal loans and direct sales. With over two decades’ experience in financial services, Saoud has worked in numerous areas across legal, company secretary, sales and product management roles with the likes of Aussie Home Loans, GE Capital, HSBC and Norton Rose Fulbright. Saoud is a passionate leader with proven ability to grow businesses and exceed targets through innovative strategy and effective execution.
Pepper Money
Barry Saoud
Peter Vala has extensive experience in residential, commercial and development finance. He specialises in strategic implementation, leads the Thinktank relationship manager team, and works closely with brokers and aggregators.
Thinktank
Peter Vala
John Mohnacheff is Liberty's ebullient and charismatic group sales manager. With over 30 years of insurance, banking and finance experience, he is committed to improving the sales habits and disciplines of the entire group sales team. Before joining Liberty, Mohnacheff held executive roles at Westpac and Bank of Melbourne. He has a Bachelor of Business and a Marketing Master’s from the University of New England, and a Postgraduate Diploma in Organisational Behaviour from the University of NSW.
Liberty
John Mohnacheff
“A broker that has partnered with a major aggregator is automatically accredited to write all of our loan products, which include residential, commercial, SMSF,
construction and development”
Cory Bannister, La Trobe Financial
It’s a bird! It’s a plane! It’s a super fund!
The attraction of non-banks
Cash flow for businesses
Published 23 Aug 2023
Peter Vala
Thinktank
Barry Saoud
Pepper Money
Peter Vala
Thinktank
Matthew Porch is a financial services professional with extensive experience in the banking industry. He held corporate banking positions at Lloyds Banking Group and HSBC in the UK, then joined the ANZ corporate banking division in a credit role in Australia before becoming a relationship manager in small business lending. After a short stint as a finance broker, Porch joined Aquamore as a national sales manager and is now head of distribution. He has a Master’s in Applied Finance, as well as qualifications from the Chartered Institute of Bankers in Scotland and the Chartered Institute of Securities and Investment in London.
Aquamore
Matthew Porch
Barry Saoud joined Pepper Money in July 2021 as general manager, mortgages and commercial lending and is responsible for its strategic direction and operating performance across product, credit and settlements sales functions for Australia and New Zealand mortgages, commercial loans, personal loans and direct sales. With over two decades’ experience in financial services, Saoud has held numerous roles across areas ranging from legal to company secretary, sales and product management at the likes of Aussie (Home Loans), GE Capital, HSBC and Norton Rose Fulbright. He is a passionate leader with proven ability to grow businesses and exceed targets through innovative strategy and effective execution.
Pepper Money
Barry Saoud
Peter Vala has extensive experience in residential, commercial and development finance. As general manager partnerships and distribution at Thinktank, he specialises in strategic implementation, leads the non-bank's relationship manager team and works closely with brokers and aggregators.
Thinktank
Peter Vala
Thinktank Market Focus report, July 2023
La Trobe Financial is Australia’s leading alternative asset manager and a proven and trusted investment partner for institutional and retail investors with c. A$17 billion in assets under management. Operating Australia’s largest retail credit fund, La Trobe Financial has the most diversified funding program of all non-bank lenders operating in Australia. Since 1952, La Trobe Financial has been driven to help people realise their potential with specialist financing and investment solutions.
Find out more
“For several years now, our SMSF product has been one of our most popular loans,” Bannister says.
“With more and more Australians opting to invest their superannuation in real estate, considering an investment in a commercial property could help diversify a borrower’s portfolio. Bringing a customer’s attention to the benefits of commercial property investment – be that within their SMSF or otherwise – could help open a door of possibilities for both brokers and their clients.”
It’s well reported that broker market share in the commercial property loan space is significantly underweight at 38% of new loans compared to market share of around 70% of new residential lending.
It’s important that brokers don’t miss out on any gains at stake in a market that has potential to grow further. This is especially true if the only reason brokers are not capitalising on commercial opportunities is a lack of knowledge.
“In some instances, brokers may be walking away from loan transactions that don’t prove up in the initial scenario but when examined in more detail can be transformed into workable deals with the
right guidance and input,” Vala says.
One of the main strengths that non-banks like Thinktank and La Trobe Financial have in the commercial area are their robust support systems with ease of use for brokers.
Potential for more traction
It’s also well known that the broker share of the commercial lending market is much lower than their share of new loans for residential, at 38% versus over 70% respectively. This underrepresentation is ripe for change.
“We believe the next two years could provide brokers with an opportunity to make significant inroads in rebalancing this ratio, and it’s likely to require the assistance of non-bank lenders,” Bannister says.
Brokers have a chance to diversify away from overreliance on residential. “There’s a lot of opportunity for brokers who do want to step it up, expand their knowledge in the commercial lending space and diversify their business and income streams,” Saoud says.
“We don’t make brokers jump through any additional, laborious hoops to begin writing commercial loans,” Bannister says.
“A broker that has partnered with a major aggregator is automatically accredited to write all of our loan products, which include residential, commercial, SMSF, construction and development; and our credit-skilled BDMs make themselves available to guide brokers through the process if it’s new to them.”
Reaching out is the first step.
“Engaging with a trusted partner who can quickly workshop a loan application can make all the difference,” Vala says.
Collaborating with knowledgeable and experienced people will help brokers efficiently evaluate the potential for success of any given lending scenario, saving valuable time and resources while at the same time expanding their potential customer base.
“This, paired with becoming more familiar with commercial property, will bolster a broker’s office,” Bannister says, “making them more resilient to external factors and ultimately becoming more profitable.”
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Matthew Porch is a financial services professional with extensive experience in the banking industry. He held corporate banking positions at Lloyds Banking Group and HSBC in the UK, then joined the ANZ corporate banking division in a credit role in Australia before becoming a relationship manager in small business lending. After a short stint as a finance broker, Porch joined Aquamore as a national sales manager and is now head of distribution. He has a Master’s in Applied Finance, as well as qualifications from the Chartered Institute of Bankers in Scotland and the Chartered Institute of Securities and Investment in London.
Aquamore
Matthew Porch
Barry Saoud joined Pepper Money in July 2021 as general manager, mortgages and commercial lending and is responsible for its strategic direction and operating performance across product, credit and settlements sales functions for Australia and New Zealand mortgages, commercial loans, personal loans and direct sales. With over two decades’ experience in financial services, Saoud has held numerous roles across areas ranging from legal to company secretary, sales and product management at the likes of Aussie (Home Loans), GE Capital, HSBC and Norton Rose Fulbright. He is a passionate leader with proven ability to grow businesses and exceed targets through innovative strategy and effective execution.
Pepper Money
Barry Saoud
Peter Vala has extensive experience in residential, commercial and development finance. As general manager partnerships and distribution at Thinktank, he specialises in strategic implementation, leads the non-bank's relationship manager team and works closely with brokers and aggregator
Thinktank
Peter Vala
Thinktank is an independent non-bank financial institution specialising in the provision of commercial-property mortgage finance of up to $4m and residential-property mortgage finance of up to $2m in the Australian self-employed, PAYG and SME sectors. Since 2006, Thinktank has provided over $6.5bn worth of commercial, residential and SMSF lending solutions, which have enabled thousands of borrowers to achieve their goals of acquisition, refinancing and equity release. Thinktank offers a range of lending solutions, including Full Doc, Mid Doc (Alternate Income Verification), Quick Doc and SMSF loans.
Find out more
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Circumstances driving business to non-banks
In what at first glance might seem counterintuitive, higher rates are actually driving more business to brokers in commercial lending.
Commercial borrowers are faced with higher repayments, the effects of which are exacerbated if
there are ongoing review clauses and covenants attached to their loans – a common feature of commercial loans provided by the major lenders.
“Whilst this is a headwind for borrowers, it can be a tailwind for brokers as customers are required to seek alternatives to major banks to finance their commercial property,” says La Trobe Financial chief investment officer Cory Bannister.
“Rising interest rates can cause interest cover ratios to default,” he explains. This often forces the borrower to seek funding from alternative lenders via brokers.
Cash flow for businesses
Property market outlook for office, retail and industrial
Fair/stable
PERTH
Good/stable
Fair/stable
Office
Industrial
Retail
Fair/stable
BRISBANE
Strong/improving
Fair/stable
Office
Industrial
Retail
Fair/stable
ADELAIDE
Good/stable
Good/stable
Office
Industrial
Retail
Fair/stable
SYDNEY
Strong/stable
Weak/stable
Office
Industrial
Retail
Fair/stable
MELBOURNE
Strong/stable
Weak/stable
Office
Industrial
Retail
YoY change
Click to see more
+2.5%
YoY change in lending to businesses
750
million
500
250
100
Source: RBA Lending to Business – Business Finance Outstanding by Business Size and Interest Rate Type – D14 data, July 2023
$142,577
$333,657
Dec 2022
Jan 2023
$688,316
$141,771
$331,522
$691,866
$333,050
$694,975
$142,069
Feb 2023
$142,631
$337,889
$701,510
Mar 2023
$411,163
$624,778
$156,494
Apr 2023
$417,374
$625,407
$158,224
May 2023
small businesses
medium businesses
large businesses
+12.3%
+16.5%
+1.4%
+10.5%
+16.0%
+2.7%
+9.9%
+14.7%
+3.4%
+10.0%
+14.9%
+13.1%
+31.5%
+1.0%
+15.4%
+31.9%
-1.1%
Click city to see more
Thinktank Market Focus report, July 2023
Cash flow for businesses
“We’re seeing an increase in SMSF limited recourse borrowing arrangements for purchase and refinances, and our recent policy changes further address this demand,” Vala says.
“With no liquidity requirements or minimum net asset conditions, we’ve been attracting an increasing number of customers who are also taking advantage of our ability to use projected concessional and non-concessional contributions for servicing, especially when the fund is newly established.”
SMSF growth is also being driven by more people managing their own financial affairs, especially at a time when some superannuation returns are not meeting customer expectations.
“For several years now, our SMSF product has been one of our most popular loans,” Bannister says.
It’s a bird! It’s a plane! It’s a super fund!
Potential for more traction