Commercial Mortgages in 2002 - A Different Perspective
Repositioning in the Market:
In the good old days when banks were banks and a lending manager measured his status by the number of years of service with one of five or six respected high street institutions, the only career paths outside of one of those leading institutions were with smaller lenders or the specialist commercial divisions of mortgage companies and building societies. The notion that a lending manager would move from one of those leading institutions to another, carrying his store of knowledge in different practices, was absolutely discouraged at the highest level - almost as if they thought that no-one had anything else to add to their own immaculate store of commercial knowledge and experience.
The advent of "Big Bang" in the late 1980s started to break those barriers down, firstly within the stockbroking arena and subsequently capital markets. This soon fed through to the residential mortgage markets, and the more recent plethora of mergers and acquisitions within the banking and finance sector as a whole has finally brought about some cross-fertilisation of experiences and ideas. No longer is it abhorrent for lending managers to move into different companies within the market; indeed, many now identify opportunities within other organizations, which hitherto would not have been open to them, to further their careers.
The effect on the commercial mortgage industry is now becoming apparent, and perhaps the most prominent example of this bringing together of differing skills and experiences has been the merger between the Royal Bank of Scotland and National Westminster Bank. Initially viewed with trepidation and horror by many at NatWest, resulting in the departure of many good lending managers to rival organisations, the new confidence that abounds within that organisation, especially at the Regional Business Centre level, is refreshing to encounter and provides ample business opportunities. Similarly, the re-launch of the Bank of Scotland Specialist Property Divisions, incorporating the cultural attitudes of the Birmingham Midshires commercial team and their own recent expansion, taking on many new managers, brings a new specialist property force significantly to the front of the market.
The high profile re-positioning of the First National and Abbey National commercial mortgage brands cannot have escaped the market's attention, and mention of product positioning will follow later.
Outside of these high profile and larger players, the benefit of this greater flexibility and expansion of ideas and knowledge has filtered into other established specialist commercial lenders. Nationwide have re-positioned themselves significantly into the larger investment end of the market; and whilst this has resulted in some regional contraction of their defined business areas, much of the experience of those personnel is now to be found within the commercial departments of other mortgage companies.
Market Activity in 2002
In an economic arena where confidence continues to be fragile and the opportunities for growth of lending books, especially in the commercial sector, have been less than many lenders would have hoped in the past year, the only solution for lenders to get close to their ambitions and targets has been to deliver on product, price and service. There have been noticeable improvements in service standards across all commercial lenders, and pricing has been the first tool in the lenders' army to track business from the competition. Some institutions have taken a longer term view and have looked at positioning fundamentally new products in the market, for which much credit should go to the Norwich & Peterborough for being the first commercial lender to produce a hybrid current account mortgage at the end of 2001, linked to their internet on-line bank account, which is available exclusively through NACFB members. Hard on their heels was the Abbey National offering, which has proven very popular. The pilot scheme out of HBOS, under the Bank of Scotland Specialist Property Team, for professionals initially, is now being expanded into a general market offering. Like all product offerings, it is a good way of attracting business, and ultimately a proportion of the business will still be transacted under more traditional terms, but it raises the profiles of those lenders in front of their prospective borrowers.
At the investment end of the market, competition continues to be fierce. With money costs and SWAP rates holding at low levels, the opportunity for commercial investors to leverage their existing properties on fine terms has kept the specialist investment lenders, such as West Bromwich, Britannia, Nationwide and Skipton, very busy this year.
The area of the market that has suffered has been the owner occupier market, where the lack of confidence and real growth in the economy has held back the investment plans of many companies. The commercial mortgage market has not yet found a way of reducing the transfer costs on commercial mortgages, which have to be a major consideration when remortgaging a property either for a better rate or for an element of capital raising that might not be available through the existing lender. Typically, a borrower will be faced with a lender fee of 1% and a more expensive commercial valuation than would be applicable to a similarly valued residential property. Given the nature of the complexity of titles and covenants on many commercial properties, a higher legal cost, not only through his own solicitor, but in many instances where the lender uses his own solicitor in parallel to validate the quality of the work, also needs to be factored in. Of course there might be an additional redemption penalty from the existing lending facility, which all adds to the additional costs that have to be offset within the new structure in determining the viability of a refinancing package. Whilst the sector does not seriously expect to get to the point of the domestic market, where commercial mortgages are done for free, with cash-backs to help cover legal costs and free valuations, there is still some way to go in increasing the liquidity of the market by pruning the costs of transfer to a point where customers are more readily able to conclude transactions.
Some Complex Issues:
From a marketing perspective, commercial mortgages rarely have the attraction of the "vanilla" price points available in the domestic market. Underwriting commercial mortgages is a three-dimensional risk whereby the lender would far rather quote to give best terms on an each and every basis. The opportunities to produce vanilla price points are rare and much credit should be given to those organisations which bring in tranches of fixed rate money and price them highly competitively for the small and medium sized loans, to raise awareness of their brand. Skipton and Norwich & Peterborough both work hard to maintain fixed rates in the market place, to give intermediaries a yardstick by which to measure the typical price of a commercial deal.
All lenders, above a certain minimum loan (normally £500,000), will go to the money markets and price up a transaction on both a bespoke margin and SWAP rate price. Gaining access to these daily market prices is not always easy for many intermediaries but, once gained, provides a strong opportunity to shine in front of the customer, as it gives the intermediary the technical knowledge to unravel any fixed rate offering that might be put forward by another institution and to help the customer identify the true cost of his other offer.
Whereas nearly all loans in the domestic mortgage market are done in single names or joint names, and in the Buy to Let market limited companies or other structures account for only 15% or 20% of borrowings, the numbers and different types of structures within the commercial mortgage arena are almost too numerous to list. Lenders continue to factor into their model pricing additional margin costs, where recourse to the ultimate borrower is more and more restricted. Lending to offshore companies from far across the world, with directors who are not readily identifiable, not only increases the lenders' perception of risk (unless of course it is an investment building with the British Government as tenant) but also raises complex issues over the identity of clients and money laundering challenges.
The Future Prospects
There has been much speculation about new lenders entering the commercial mortgage market. Many intermediaries have been questioned by lenders formulating commercial lending strategies; and whilst there is little time left for new entrants in 2002, there are several well advanced programmes in the pipeline. Some will lend on balance sheet, targetting niche sectors with high gearing and competitive pricing, whilst lenders with wholesale or securitisation programmes to fulfil will take a broader approach but will need to hit volume quickly to fill each programme. Both areas will increase competition in the sector, thereby affording the borrower a greater choice and the intermediary the opportunity for new client contact.
Historically, the commercial mortgage industry has not been good at promoting itself and helping borrowers and intermediaries understand the complex natures of its business. The need to change these perceptions and further educate the industry as a whole for everyone's benefit, was recognised by the formation of COMFEX, the first business finance exhibition for intermediaries and borrowers alike, founded by the NACFB in 1999. This year it appears under joint branding with Earls Court Olympia as the Business Finance Show, where seminars are available to help extend the store of knowledge of show visitors. The industry this year also celebrates the tenth anniversary of the foundation of the NACFB; and, to mark the event, is launching the Business Finance Awards, to recognize the excellence of all the institutions within the commercial finance industry and to encourage us all to make greater advances in 2003.