Cracking the commercial world

Commercial property sales turnover is noticeably lower than a year prior – $5.9 billion in 2008 compared to $16.8 billion in 2007, according to CB Richard Ellis (CBRE) – as a result of the global financial crisis and an overall tightening on costs.

However the most recent cut to the official cash rate is expected to fuel increased private investor demand for commercial real estate investment opportunities.

Indeed, CBRE has revealed that private investors emerged as the single biggest purchasing group in 2008 – accounting for 26 per cent of all commercial property sold, which was up from 9 per cent the year prior.

“Times are tough but a lot of brokers are showing they can successfully branch out in this area,” says Dennis D’Angelo, national commercial manager at choice aggregation services, which has seen its commercial business grow by around 270 per cent in the last two years.

So what has prompted the surge in interest in commercial lending?

With the onset of the credit crisis, commercial lenders – like residential lenders – have tightened their lending conditions and criteria.

Borrowers are now seeing banks adopt a much tougher approach, with many not prepared to renew loans on the same terms as the original loan. Plenty of borrowers have been forced to shop around for a better deal as a result.

“This represents a strong opportunity for brokers to capture these borrowers and find them more attractive term agreements,” says Cathy Dimarchos, general manager of commercial lender Sintex.

Choice aggregation services’ Dennis D’Angelo says the current environment also presents an opportunity for brokers to help borrowers who are finding market conditions confusing and challenging.

“As hard as it is for brokers right now, it’s harder for borrowers and they need help finding funding,” he says.

“This signals a fantastic time for brokers to get involved in this space.”

Breaking in

Mr D’Angelo says securing commercial mortgage clients now will pay big dividends for brokers down the track.

“When the market recovers they’ll stick with you,” he says, “and commercial deals are usually two to three times bigger than residential so there’s great income potential there.”

For residential brokers concerned that commercial lending is too different and complex compared to what they do now, it’s a question of getting educated.

According to Ms Dimarchos, although more complex deals are best left to the specialists, regular commercial, retail and industrial deals can still be written by residential brokers.

“It’s simply a matter of becoming familiar with lenders’ products and what they’ll accept as security,” she says.

For residential mortgage brokers looking to break into commercial lending, the best place to start is with their existing client base.

Brokers may be surprised at just how many of their existing clients will be interested in investing in the commercial sector or in purchasing business premises.

A lot of brokers generate commercial business through their existing client base and referral partners, particularly accountants and financial planners,” says George Sotiros, IMB’s senior manager of direct and third-party channels.

“We have also found that a number of residential brokers actually move into the commercial space as a result of their referral partners’ requests.”

Brokers looking to break into the commercial market need to “look in their own backyard”, Mr Sotiros says.

“I am also a strong believer in the opportunities local business events hold – these provide the golden opportunity for brokers to talk with business owners and likely business investors. You can get your name out there without venturing down the expensive advertising campaigns and promotions channels,” he says.

Distributing pamphlets in industrial areas is another prospecting tool Mr Sotiros says works well for brokers.

As a closing remark, Mr Sotiros is quick to remind brokers not to be perturbed from writing commercial business because of their perceived complexity.

“Commercial deals don’t need to be hard – the key is to make sure you know all the information you need and to have it. There are enough support mechanisms in place to assist brokers; it’s simple to write if you break it down into easy steps.”

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COMMERCIAL BROKING AT A GLANCE

• Wide range of products and variables available
• Bank’s terms are usually short, such as three or five years, while non-banks tend to offer longer term loans
• Interest rates are usually higher compared to residential mortgages but it depends on what is offered as security
• Documentation can be more complex if more than one individual and companies/trusts are involved
• Turnaround times are similar to residential however property valuations can take up to ten days

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STREET TALK

Andrew palmer, AustComm’s commercial finance manager, gives his take on current commercial opportunities for brokers

How have the last six to 12 months been?

Enquiries remain consistent but there has been some scare-mongering in the media and some clients are worried about what’s going on in the economy. I have found that a deal you would have gotten through no worries 12 months ago, the lenders might not entertain at all anymore. But if you know what’s available and how the lenders operate there are definitely deals to be done.

Where are you writing the most business?

A mixture really. There’s still a lot of development going on; it’s just a matter of knowing how to put the deals together. One deal I’m working on at the moment is a combination of a land purchase and then a building development.

What are your expectations for the year ahead?

I’m positive and confident in what i can do and optimistic about the year ahead. People are looking for funding facilities so there’s an opportunity for brokers who know what they’re doing to help them. If you know what you’re doing you’re not going to be in trouble.