On the 14th of September 2007, queues formed as savers at Northern Rock panicked and tried to retrieve as much of their money as they could. We are now twelve months down the line from the first run on a UK bank in over 100 years and in that time other lenders have closed their doors to new business. Notable commercial finance lenders whose doors are currently closed include 5D Finance; Salt Commercial; Base Commercial; specialist payroll funder SmartFlow Finance; and, of course, Commercial First.
The impact on commercial finance brokers has been a little more difficult to gauge. Anecdotal evidence from the calls received here at the NACFB head office paint an extremely polarised picture. At a recent event in Birmingham, I met one member who was actually in the process of expanding her business – she had just recruited one new broker and was looking for a second – to cope with the volumes she was receiving. At the other end of the spectrum, one broker local to us has admitted defeat and closed their doors in order to cut their losses.
So in order to look at the broader picture I have analysed the results of this year’s annual survey. Every year the Association carries out a survey of its membership to find out the levels of business which have been written in the previous twelve months, what they want from lenders and also what brokers want from the Association.
2008£m’s 2007£m’s Difference
Commercial Mortgages 5,735 4,940 +16.09%
Bridging/Short Term Finance 836 1,118 -25.18%
Leasing & Asset Finance 1,112 1,200 -7.33%
Factoring & Invoice Discounting 687 182 +276.09%
Vehicle Finance 1,085 1,261 -13.98%
Buy-to-let 3,918 9,513 -58.81%
Other 2,073 969 +113.83%
TOTAL 15,449 19,186 -19.48%
The table above shows the levels of business written by NACFB members from July 07 to June 08. Now obviously, the credit crunch didn’t start to bite commercial brokers until around November time, with the first commercial lenders starting to disappear at the beginning of the following year. This means that from the figures above, there were at least four months of relatively normal conditions and its ensuing pipeline. In other words, the picture is not as bleak as it could have been. There has actually been a rise of 16 per cent in the amount of commercial mortgage business written over the period. Even if taken in context with the rise of 9 per cent in the membership level, this is still a good increase and at around the level we would expect to see if the market had been unaffected by any kind of economic turmoil.
Bridging and short term funding has taken a dip this year – which is probably more of an indirect impact from the problems faced by the rest of the market. Bridging can be used as a short-term solution to a number of different problems; but good bridging loans rely on a good exit strategy. As commercial mortgage lenders become more cautious or withdraw from the market (and, more worryingly, withdraw offers) bridging lenders and their clients are left without that exit. It’s not surprising then, to find that the amount of bridging written by commercial brokers has reduced as a result.
Buy-to-let business has also taken a huge hit. The number of buy-to-let mortgages available to clients has dwindled to almost nothing – a fact which becomes startlingly apparent when you look at the figures. According to Business Moneyfacts, on the 31st August 2007 there were 3,662 buy-to-let mortgage products, of which 1,423 were classified as ‘sub-prime’. Today that number has fallen to 597 products – of which only two are sub-prime.
The changes have impacted the market in different ways: experienced landlords with established portfolios have existing funds they are able to invest which cuts down on loans-to-values and, in turn, the risk to the lender; so although they are finding life more difficult now they are still in a good position. The picture for the novice landlord is not quite so rosy, as falling yields and (until recently) rising interest rates combine to make things difficult for them. Higher loan to value buy-to-let loans are a thing of the past as are low fees, and interest rates are also higher than twelve months ago. Not a good time to be dipping your toe in the residential property investment waters.
One real surprise has been the enormous rise in factoring and invoice discounting business. It can be no coincidence that invoice finance is one area which remains unscarred by the current crisis. Factors and invoice discounters can do well in a downturn as the pressure mounts on an SME’s cashflow. The Association has also been encouraging commercial mortgage brokers to diversify to survive the downturn and factoring and invoice discounting offers a good ‘natural fit’ with the kind of business these brokers already write.
The other area which stands out is the category with the rather inauspicious heading of ‘Other’. During the course of collecting the data this year it became clear that some brokers preferred to list development finance under the ‘Other’ category, rather than under commercial mortgages. In order to get a better picture next year, we will add development finance as a separate category.
As I mentioned at the beginning, membership of the association has increased by 9 per cent over the 12 months ending June 08. But the landscape of brokers made up by the membership is gradually shifting. As time has gone on, many of the residential mortgage brokers who were keen to diversify into commercial finance in the face of the oncoming storm, have found the commercial mortgage market tougher than they originally thought as the impact of the credit crunch spread to the business finance market as well. Some of these brokers have reverted to their original business model or gone out of business altogether. Some, however, have made a go of their new venture. By learning about both the market they are trying to enter and how the lenders in that market want a deal to be presented to them, the opportunities available to these brokers have opened up and allowed them to survive in turbulent times.
Another noticeable trend is the number of established commercial finance brokers who have decided that now is the time to join the Association. Well-established and with years of experience, these brokers had previously felt that they hadn’t needed to join, but the current conditions have made even these brokers apply for membership. Far from the ‘dilution’ of commercial broker experience feared by some, the membership is actually becoming more experienced with these members’ arrival.
Market forces have placed lenders in a dominant position which allows them to cherry pick the deals they want to write; and so ‘brokers’, who felt that the limit of their involvement with a client is handing over their name and telephone number to a lender, now find it virtually impossible to complete any deals. Lenders are only looking at business which has been presented in the right way, by brokers who understand both the market – and their client’s business.