By Lucy Waters - Managing Director for Aria Finance
While many have retrospectively claimed to have predicted the Great Financial Crisis (GFC) of 2007-09, only a relatively small group of people actually saw it coming.
Since then, a host of mini–Dr. Dooms – or ‘permabears’ in economics slang – have sprung up, ready to pronounce the death of any market that even threatens to wobble.
However, the thing with permabears is that while they are sometimes correct – as Mr Roubini was about the GFC – other times they are very wrong. It feels a little bit like that with the commercial property market at present.
There’s no denying that the past few years have been tough. The shift to homeworking has led to a lot of suffering for commercial landlords and the thousands of firms around the country that rely on the custom of commuters.
At one point, it seemed as though the traditional 9-5 that had long been a part of our work culture had been consigned to the history books forever. But things are changing. Slowly but surely, workers are returning to the office.
Nowadays, it’s common for firms to insist on workers being in the office at least three days a week. Some of the biggest firms in the City are even stricter, requiring employees in certain divisions to come back into the office full-time.
In the medium-to-long term, the slow reversal of the work-from-home trend will have positive ramifications for the commercial property and mortgage markets.
Participants sense this and, as a result, protestations that the commercial property market is in long-term decline are becoming rarer. In fact, some market observers – me included – are relatively upbeat about the market’s prospects.
According to a large share of respondents to the Royal Institution of Chartered Surveyor’s latest Commercial Property Monitor, the market “has reached the bottom of the current cycle”.
Separately, 72% of commercial property developers/landlords surveyed recently by Together, the lender, said they felt optimistic about the outlook for their businesses.
Respondents also predict that the commercial lending market will have risen by 32% to around £118bn in the next four years.
If this increased optimism is warranted – and for what it’s worth, I think it is – it’s only a matter of time before we start to see an uptick in demand for office space. That will push up prices and result in greater market activity.
In short, there is opportunity in this market. Anecdotally speaking, I get the sense that the commercial market has been identified as an area of growth for many lenders.
A lot of those lenders that do operate in the commercial market also have a presence in buy-to-let. However, the trouble with the buy-to-let market is that it is saturated.
The buy-to-let market has shrunk more than 50% over the past year, according to UK Finance, yet the number of lenders operating in it remains largely the same.
Therefore, they are all fighting for a piece of a much smaller pie. When that happens, you have two choices: cut your rates and resign yourself to lower margins, or move up the credit risk spectrum, which can make lenders uncomfortable.
On the other hand, the commercial mortgage market is far less competitive, meaning margins tend to be higher. It is also dominated by challenger banks, with very few non-bank lenders operating in this end of the market.
There are good reasons for that of course, the main one being that it is a highly complex area of lending which requires specialist expertise. It’s not the sort of market you enter on a whim.
However, there is a huge opportunity for enterprising non-bank lenders that want to diversify their revenue and make a splash in a recovering and potentially lucrative market.
