Commercial Property has traditionally proven a sound investment for investors in Australia for over a long period.
However, while things appeared relatively positive in the last quarter of 2021, a lot has changed since then.
According to the ANZ-Property Council Survey released in July 2022, uncertainty regarding the economy, rising interest rates and concerns about finance availability, have clouded the outlook.
Commercial Property Finance – Current Reality
Against this background, Lenders are likely to be more cautious and selective when lending to Commercial Investment Property .
Finance is still available, but preparation, research, and how your request is presented, are critical to a successful outcome.
In this post, I outline key areas on which Lenders focus to help you prepare your finance application.
Commercial Property Finance – What is being financed?
Lenders have always focussed on what they are being asked to finance.
They do this to understand the potential risks involved, which then flows through to their pricing, terms & conditions, etc.
When assessing Commercial Investment Property Finance applications, key elements of the property they focus on include the:
- Location attributes
- Quality of the property improvements for the intended usage
- Future capital expenditure requirements (minor or major)
- Industry sector (low, neutral, or high risk) of the tenants
- Current and potential alternate use of the property (and cost to convert)
- The degree to which the property is specialised
- The length of the lease(s) and terms
- Quality, spread of tenants, or concentration risk (i.e. to a single or few tenants)
- Environmental risks
- The Weighted Average Lease Expiry (WALE)
- Likelihood of current or future space being leased
- Etc
Who are we lending to?
Another important aspect of not only Commercial Property Finance but all lending, is the applicant:
- What is their background, track record, and experience?
- How strong is their overall financial position?
- What is their overall debt servicing capacity? (in addition to property related borrowings this may include, all business and personal borrowings)
- How current is their financial information?
- What options does the applicant have if things don’t go to plan?
- Who are their professional advisers and to what extent are they used?
Commercial Property Finance – How much can I borrow?
The first question we are often asked when it comes to Commercial Property Finance is:
- How much can I borrow?”
While your equity contribution is important, the key driver is what you can afford to repay:
- Not just the finance you are seeking, but combined with all other business and personal borrowings
- Can you still repay your borrowings if interest rates increase? (lenders include an interest rate sensitivity buffer to allow for a potential increase in interest rates)
- If an Interest Only arrangement is sought, will you be able to repay the loan over the remaining commercial term? (For example, if a 5-year interest only term is sought, could you repay the loan in full over the remaining 20 years at a sensitised interest rate?)
To answer these questions, we complete a Bankability Assessment, before approaching the market for finance on behalf of clients.
This powerful process:
- Allows different structures and options to be tested
- Clearly identifies what you can afford to borrow – both at current rates and on a sensitised basis
- Helps identify those Lenders most suited to what you are seeking and your circumstances
Know where you stand before you approach the lenders so that you are not flying blind. This helps you to obtain the finance you are seeking and negotiate terms that are favourable to you.
Take Control - be Prepared
To achieve a successful outcome and obtain highly competitive finance there is no substitute for preparation:
To achieve a successful outcome and obtain highly competitive finance there is no substitute for preparation:
- Gather all the financial, and other data, that Lenders require to process your finance request
- Collate information about the property being purchased or refinanced, e.g, copy of the leases & note critical details, the rationale for the purchase/refintigation measures etc (Most Lenders will also want an independentvaluation, for first mortgage lending purposes
- Ensure you can demonstrate the ability to service and repay your borrowings , (property, business, equipment & personal) at today’s interest rates and on a sensitiv>
- Identify issues that may be of concern to Lenders & either rectify, or mitigate them
- Prepare a detailed Finance Proposal request
- Identify those Lenders most suited to the type of finance you require
At The 500 Group we have assisted many clients access Commercial Property Investment Finance from large Shopping Centres to highly specialised properties and owner occupied business premises, etc.
If you need finance or would like to learn more about our Bankability Assessment and how we can assist, don’t hesitate to get in touch.
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