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Alternative Bridging Company
Tom O’Neill
Managing Director

As a bridging lender who is moving away from the residential market and choosing to be more active in the commercial bridging market we have noticed a sharp rise in activity levels.

However this is not all good news because the ability for any intermediary to perform a commercial mortgage transaction is still severely hampered, thus getting me out of the loan they put me in is very much restricted by the issues of liquidity in the current market.

Bristol & West Property Finance
James Penman
Head of Bristol & West Property Finance

2008 has been a reality check for the UK commercial mortgage market and after the slowdown that first showed in 2007, the market has accelerated into a deep and prolonged decline. The impact of the global credit crunch, the subsequent change in both the ownership and approach of global funders plus an ever accelerating UK consumer debt/lack of confidence led recession has severely limited the UK market. Activity levels are markedly down year-on-year and the market is more polarised than ever: the haves (cash rich, funded) who are ready to pounce but still keeping their powder dry and the have nots: (highly geared, cash poor, experiencing tenant/occupier demand difficulties). A dangerous mix.
2009 looks gloomier with the UK corporate downturn recession now beginning to impact tangibly the UK commercial property market. Central government initiatives to stimulate demand and increase disposable income are welcome but no politician can buy confidence and that is what is most clearly missing.

The banks will need to steer a very precise course for the next 12 months: manage the troubled waters with those clients who have the vessels and experience to navigate stormy waters, throw lifebelts to those who need and deserve them and, sadly, there will be some casualties.

History suggests that, in time, the market will return and all parties will need to bear this in mind. The extent of the return is unlikely to see a repeat of the heady days of 2004-mid 2007 but that is probably no bad thing. If the market returns to more fundamental disciplines and funding – assuming banks and investors learn the lessons of the latest crash – it will tend to be more stable and that is to be welcome.

Lancashire Mortgage Corporation
Gary Bailey
Director

The year 2008 will no doubt be remembered as the year of the credit crunch which affected every finance market, not just the commercial sector.

Fortunately, from the perspective of a specialist lender serving a wide variety of niches, several sectors of the commercial market have continued to perform steadily. Our lending in these areas has allowed us to maintain satisfactory levels of new business and to continue supporting our brokers throughout 2008.

This consistent performance has been made possible by an approach to lending that has always been prudent and responsible, something that allowed us to secure substantial funding lines in November 2007. Unlike many lenders we are still in a position to lend and we have a strong appetite for new business across our entire product spectrum, including mortgages, second charges and bridges. Our core products remain unchanged and we will still lend to any status of client, whether they have a perfect credit record or have experienced difficulties in the past. We also continue to accept any property or land as security. Individuals, sole traders, partnerships, limited companies and trust funds are all catered for in our range. Lancashire Mortgage Corporation is actively seeking new partnerships and to increase business volumes.

There are still deals to be done in the commercial sector and the current climate is creating different types of opportunity for brokers to explore. Diversification of lending across the different market sectors has become increasingly important. Offering short-term capital as well as long-term capital is a unique feature in our commercial market sector, which allows Lancashire Mortgage Corporation to cater for a wide variety of circumstances. We remain strongly committed to the market and will continue to help our brokers profit from the available opportunities during the coming year.

National Counties Building Society
Steve Iles
CEO

What can I say that probably hasn’t already been voiced in these columns? My words at this time last year were – “Commentators of the current highly publicised credit crunch warn of tightening credit controls by lenders; a hardening of LTV’s and margins, but I have to confess I’ve not seen any evidence of this as yet”. That soon changed!

But 2008 has been a roller-coaster ride, providing us with the opportunity to earn our credentials and, by virtue of being one of the few with an eager appetite to lend, an opportunity to source quality business which otherwise would have gone to our established rivals.

Our board’s aspirations have always been to build a commercial book on the back of prime, quality investment property, and 2008 has seen us achieve great steps towards this. Throughout the year, there has remained a keen demand by established professional investors for strong covenant assets, and we have been on hand to support this.

Auction activity remains good, albeit a long-overdue price/yield adjustment has taken, and is continuing to take, place. Providing guidance to intermediaries as to just where our appetite lies has been a bit of a struggle, but once they know what we can deliver on, good solid relationships have been established.

Our lending criteria has always been risk conscious, which has proven positive with regard to the management of our existing, albeit small, portfolio. We, like many, needed to review our position, in particular with regard to risk exposure. Our appetite for bigger-ticket deals, given our size, has been tempered, and we see ourselves concentrating far more in the region of £250,000-£4m.

We have always maintained a low reliance on wholesale markets, but nonetheless pricing has been an issue, driven primarily by fluctuating rates offered to depositors and savers. Education in the economics of charging higher rates on lending to those offered to savers has come as a culture shock to some!

None of us can remain unaffected by the turbulence in the market, in particular the turmoil to befall our colleagues at so many established banks and mutuals.

Our focus remains on good quality commercial investment property. Despite the depressing state of the high street at this moment, it will survive and such property will remain in demand for professional investors. We will continue to support office and light industrial investments, but it’s fair to say that these will be scrutinised closely given the excess of capacity in the market. When the bottom of the market is finally identified, there will be a clamour for property and deal activity will be high. Famine to feast – let’s just not lose sight of where we’ve come from!

We will also continue to support the owner occupier sector, but will be restricting our area of operation to solid businesses within the healthcare and leisure sector. Good quality, care homes, hotels, pubs and restaurants, with good management, location and proven track record, should weather the storm – it won’t be easy for operators, but those with the right skills will make it. Regrettably, any interest we did have in owner occupier retail, guest houses and more specialist businesses is quite firmly on the back burner for now.

In summary, 2008 has been a very difficult year to operate in, with not a small amount of crystal ball gazing required. But we’ve remained open, and still are, for business… the right kind of business that is.

Nationwide Commercial
Mark Jenkins
Director

The past year has been incredibly tough for many operating in the commercial property market, and the outlook for 2009 is not positive. Despite LTV covenants being breached this year, a lack of significant tenant default has meant investors, still in receipt of relatively stable cashflows, have been able to service their financing commitments. This situation could change in 2009, as the effects of the recession start to take hold on tenants, and lenders will increasingly be faced with decisions on how to tackle customer defaults. Capital values are predicted to continue falling, with investors’ requirements for higher yields and the possible fire-sale of assets likely to exacerbate this price deflation.

However, while these issues will be challenging, the commercial property sector has the resilience to survive the recession. Lenders which have fallen into administration or been forced into mergers have garnered significant press coverage, but others continue to lend, with a strong focus on prudent risk levels and appropriate margins. At Nationwide we undoubtedly face challenges, in line with the rest of the market, but I believe we have the capital reserves and robust balance sheet needed to withstand the tough trading conditions that ultimately will characterise 2009. Businesses that can endure these difficult times stand to benefit from any opportunities a gradually recovering market, not likely to emerge until 2010 at the earliest, may present.

Norwich and Peterborough Building Society
Graham Toy
Head of Commercial Lending

I am delighted to confirm that the Norwich and Peterborough Building Society remains open for business and are looking forward to the challenges of 2009. We will continue to look for and have an appetite for good quality businesses, particularly owner occupied SME borrowers.

As a number of our competitors have stopped lending we have experienced a noticeable increase in the number of deals being offered. The message I would give to commercial mortgage brokers is that you need to invest time putting a good case together so that you are successful in securing the lender’s interest at an early stage.

When considering lending margins for 2009 I expect to see further increases to reflect the true cost of funds that all lenders will be managing. As a Basel II lender Norwich and Peterborough has an advantage in that borrowers benefit from a lower margin as we endeavour to share the benefits of a lower cost of capital. As base rate falls the benefit to borrowers diminishes as minimum rates will certainly start to trigger. Libor borrowers will continue to benefit as Libor continues to drop.

In conclusion I think 2009 will be quite tough and will provide a testing environment for all lenders. I am convinced there will be good opportunities presenting themselves. It is all about locating the nuggets!

Skipton
Graeme Taylor
Head of Commercial Lending

Despite the well publicised problems surrounding the credit crunch Skipton continued on an active basis in the market providing competitive products and more importantly premier service levels. It is anticipated that completions for 2008 will be in the region of £120m and by the end of the year our commercial book will fall marginally short of £1bn, including approximately £350m of buy-to-let portfolio business.

From a personal perspective I have seen the market in terms of lenders shrink during the year giving less choice to both brokers and customers. Unfortunately I do not see an early end to the problems we all currently face and with unemployment rising daily both the residential and commercial market will come under more pressure. There is little doubt that residential arrears and possessions will rise and with more people out of work there will be less money available to spend on goods and services which will have a further impact on the commercial market.

We have already seen a number of takeovers and mergers in both banking and the Building Society movement and there will undoubtedly be further such events in 2009. This will again reduce choice which inevitably has implications for the introducer community. There has been a reduction in demand in the marketplace with values of property falling dramatically. For those transactions that take longer to complete due to legal problems we are seeing values reduce with a corresponding reduction in lenders contribution leaving customers with a greater deposit to fund or withdrawal from the transaction which leaves them out of pocket.
There are investors out there with funds available waiting for the bargain purchase which will enable them to achieve long-term growth although their choice of lender is diminishing and loan-to-values falling.

I wish I could finish with a positive message but having found out that the Society has withdrawn from the market and most of my team made redundant this is difficult to achieve. There is significant knowledge and experience contained within this team which I believe is the best in the market and I believe the society has made a very short-term decision which may have implications going forward. This decision removes another lender from the marketplace who offered something different and the only consolation has been the dozens of great messages from introducers which has to some extent lightened the mood within the office.

Universal Acceptances
Jonathan Cranston
Director

The credit crunch has resulted in an uplift in new enquiries and a better quality of case on offer, so cherry picking is the order of the day.

WM Mann & Co
Bruce Mann
Director

The commercial mortgage sector has changed significantly over the past year. It seems that very few funders are prepared to support speculative developments and to a certain extent Mann & Co. falls into that school of thought. However we are prepared to fund good developments in attractive, easy to develop sites but we have reigned in slightly our maximum exposure from 70% to somewhere between 60% and 65% depending on the customer, the development, and our own views.

Over the past few months or so we have noticed a substantial increase in the number of enquiries being received by us and this is solely a result of the unwillingness of many other funders to provide development finance. We remain cautious for 2009 and hope that the major lenders or the government can do something to kick-start the first-time buyers in the housing market. We are certainly not advocating funders provide 125% mortgages or mortgages of five or even six times someone’s income. Even at the time of these deals we thought that not only were the banks making mistakes but they were encouraging customers to behave recklessly.

What we need is a return to prudent banking and if this can be achieved then 2010 should be reasonable for business.

Summary

I always try to remember the courtesy of thanking those who make our reviews possible and on this occasion I am especially grateful because, and understandably, so many decided to lie low this time.

The commercial property market is in freefall in many areas, values are dependent on liquidity and the prosperity of the business within the bricks and mortar.

So many sectors served by the commercial mortgage industry are experiencing fundamental change. The wet trade is seeing more pubs closing every week, the high street is taking a beating and several small shopkeepers reliant upon the surplus in a pay packet are seeing business go off the cliff.

There may be some light at the end of the tunnel for pubs. Whilst the old exit route of shutting them and building a few houses has been closed down, many of the big pub chains, responsible for so many truly awful managed pubs, have been ambushed by their debt levels and are having to sell off some of their chains.

There is still the smoking ban and drink driving laws to overcome but any spark of recovery in this great British institution is to be welcomed. We will examine more in this area next month in our wet trade edition in February.

Buyers are moving in on distressed and cheap opportunities so the market will find its level, but maybe not for some time yet.
The message is that some commercial lenders are still open for business, may they prosper.

Editor
 

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