Business intelligence: understandable mistrust in the wake of the pandemic

Unlike other sectors of the mortgage market, which have boomed, commercial real estate has suffered during the pandemic. Empty offices, closed pubs and restaurants and restricted retail outlets have made lenders very nervous about lending in this market. Ironically, one of the least attractive businesses, takeout, has become one of the most successful.

However, for good business owners and commercial property investors, with low prices, now has become a good time to consider buying commercial property, especially for those who had the resources to weather the downturns. lockdown until things get back to normal. But obtaining financing for these acquisitions was not easy because the risk appetite of the lenders was not correlated.

There is still reluctance around retail and hospitality

For example, one of our clients, with a thriving long-term manufacturing business, struggled to refinance their warehouses and offices at just 60% loan-to-value to take advantage of a substantial new revenue-generating contract. This is due to the reduced appetite of lenders in the industrial market and the tightening of criteria. We managed to help the client using commercial gateways, but only due to a guaranteed exit by selling some of the land held for development.

Mixed experiences

Now that the high streets are filling up again and shoppers are returning to pubs and restaurants, it’s worth watching and seeing if lender appetite is also returning. I’ve spoken with some of our Commercial Mortgage Advisors and received mixed feedback.

A dental practice with strong commercial accounts has been turned down for a fundraiser during lockdown by a high street commercial lender. The underwriter felt it was not the right time to raise more equity. This same lender is once again satisfied with this scenario but remains very cautious vis-à-vis other sectors.

Ironically, one of the least attractive businesses, takeout, has become one of the most successful

Appetite for lending in general seems to be coming back, but slowly and not for all lenders or sectors. Some lenders are still very busy via the government’s Recovery Loan Scheme; so even with a renewed appetite, this program hogs most of their resources and leaves little room for other loans. As this loan is 80% guaranteed by the government, it is understandable why lenders would concentrate their efforts in this way, from a risk point of view.

Covid caution

Other lenders are underwriting with a focus on the impact Covid may have had on a business. How has the company coped during the lockdowns? What are business plans? Lenders then underwrite with caution; for example, with an eye out for the possibility of another lockdown.

Gareth Norman, Trade and Development Advisor at Connect, says: “The commercial property market has undoubtedly seen some relaxation since the Covid rules were eased. There’s still quite a bit of reluctance around sectors that have been hardest hit by the pandemic, such as retail and hospitality. Office space is an ongoing challenge, with so many business models having changed due to the lockdown, so it’s unclear how these security assets will perform.

As high streets fill up again and shoppers return to pubs and restaurants, it’s interesting to see if lenders’ appetite returns as well

“The primary focus for lenders is the owner-occupier space, where underwriters remain pragmatic about their assessment of financial performance during the pandemic. However, one lender will offer a 100% loan facility for top performers, with an aggressive five-year repayment period, so innovation seems to be coming back. »

He adds: “Real estate development is also experiencing an interesting boom. However, due to Brexit, there is a shortage of materials and therefore construction costs have increased. How this will affect development projects is not entirely clear, as it either requires lower profits for developers or higher selling prices.

There are lenders, like Allica Bank and Shawbrook, who have lent throughout Covid and continue to show a real appetite for commercial. This will stand them in good stead with advisors who have found them a reliable source of lending and established rapport and familiarity.

Real estate development is booming

It’s good to see comebacks in the market, such as Together and Cynergy. The launches of new lenders, like Recognize Bank, with longer-term plans to shake up the market, are also positive. However, Recognize remains cautious at this time and restricts its distribution through sponsors until more confidence settles in the market.

Connect for Intermediaries commercial director Kevin Thomson predicts a cautious return to pre-pandemic lending for the rest of the year. Barring any further setbacks, he is confident of a much better lender market in Q1 2022.

Liz Syms is Managing Director of Connect for Intermediaries

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