The current lack of liquidity and change in credit appetite within the wholesale finance markets, and its probable consequences, has been widely covered in the media. But what will the effect of all this be on the UK commercial mortgage market?
Regarding lenders, smaller commercial lenders will undoubtedly find their funding harder and more expensive to come by. Recent market entrants have established their business models around the capital markets, either here or in the US, and will face the prospect of warehouse funding at higher rates with more restrictive terms, together with higher securitisation costs once volume is sufficient to complete a transaction.
Niche lenders relying on banks or building societies for either their funding or to acquire their loans post-completion will face the same issues – appetite has shrunk but demand remains and pricing is moving up.
High-street institutions will be far from immune, and as pressure increases on liquidity, the use of capital within these organisations will be restricted. Already there is anecdotal evidence of tighter criteria, lower advance rates and higher margins. Don’t forget mainstream commercial mortgages – and the price for risk criteria – are not published to brokers, so this shift will only filter through as deals are submitted.
As for bridging lenders, banks are happy to lend to them because the facilities are relatively small and they can see the exit. With the difficulties in the residential market, bridgers will find demand increasing.
However the bridgers and their funders will have to restrict criteria quickly otherwise they will get caught with business with no home to go to. I believe they will start to restrict their loan-to-values to maximum 70 per cent as there is no longer a queue of lenders prepared to take these deals and by definition they contain an element of non-conforming or self-declaration – neither of which are flavour of the month.
Historically there is a strong correlation between conditions in which the provision of credit to consumers is harder and the success of brokers. It holds true more so in commercial than residential that brokers tend to provide the most value for customers just outside the main appetite of the high street. If this appetite becomes more risk averse, the market potential for brokers is larger. As rates rise and the market cools, the type of business is likely to shift away from refinancing for improved terms towards capital raising as debt comes harder to obtain. Again this is a shift that should suit brokers in the specialist markets.
Irrespective of the opportunity this shift may provide – the short-term loss of confidence that the markets will feel places an emphasis on the strength of the broker service proposition and the efficiency of the business in terms of cost base. Those with a robust model who act quickly to ensure costs track trends in revenue will be in a position of strength.
Good, opportunistic marketing that is accurately targeted could help deliver some immediate results. Sentiment appears to be that we are now unlikely to see further interest rate rises – a theme reflected in the three-year money markets, which are following a downward trend. Given the uncertainty among the public, and the benefits of predictable cash flow for business clients, the promotion of fixed rates is striking a cord.
The current conditions are challenging and without precedent – especially with the importance wholesale finance now has in funding so many of the lenders. But as with all adversity there is opportunity – and a tightening of credit conditions has often been good news for brokers.
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