The thing about rising interest rates is they tend to set the alarm bells ringing, which spurs people into action.
This is no different in the commercial sector, which has been a hive of movement and activity in recent weeks — even if it has been a challenging environment.
The sharp rise in interest rates over the past year has caused some of the sector’s bigger high-street names to reassess their position in the market. Although they haven’t exited entirely, their criteria have become tighter.
At Aria, we have had a number of cases recently where a high-street lender opted against refinancing an existing loan facility whereas a year ago it would have accepted the deal.
In this environment, the best home for a lot of our cases has been the specialists
We have certainly noticed that, as rates have rocketed, it has caused some high-street lenders — although not all — to become more risk averse, particularly if commercial lending is not a core activity. That has manifested as lower loans-to-value, a tougher stance on criteria and income, and high minimum loan sizes.
Taking cover
To some extent, it’s understandable. Markets are now pricing in another two, or perhaps three, base rate rises, with the benchmark rate likely to top 6% this year. That, many analysts are warning, drastically increases the chance of the UK falling into recession, which would likely result in more commercial loan defaults.
Therefore, rather than take on any added risk, lenders for which commercial mortgage lending is not a key focus have started to dial things down.
The rapid rise in interest rates has really spurred borrowers into action
Unfortunately, for brokers and our clients, that naturally means a smaller pool of lenders from which to choose.
There is also far less product flexibility in the commercial lending space, meaning it can be a challenge to get deals to stack up.
With rates where they are, a lot of our clients do not want to lock into a five-year fixed rate at the moment; most people want a variable-rate loan. However, the issue is that many variable rates come with early repayment charges, so breaking the deal early to jump on an attractive fixed rate comes at a cost.
Furthermore, a lot of lenders will lend only on the vacant possession value at the moment, rather than the investment value, which includes the rental income. There are two issues with that: first, it means smaller loan sizes in most cases; second, you don’t know the vacant possession value until the valuation is done. If that comes back lower than the client expected, they may be left out of pocket.
Lenders for which commercial mortgage lending is not a key focus have started to dial things down
I must say, however, that some specialist commercial lenders have come to the fore and really shown an appetite to lend over the past few weeks. In the current environment, we have found the best home for a lot of our cases has been the specialists, which know this area of the market inside out and are committed to it.
They have been able to support us in lots of cases where some high-street lenders haven’t — and that has become a really positive feature of the market.
Spurred to action
Another positive feature is that the rapid rise in interest rates has really spurred borrowers into action.
As rates rocketed, some high-street lenders became more risk averse
Most of our clients are simply looking to get ahead of further rate hikes by refinancing existing debt facilities. However, we have also noticed a significant uptick in enquiries from borrowers looking to sweep up properties from those who have got cold feet in the current environment and want to offload assets.
That’s why, for all the difficulties commercial brokers are facing when placing deals, I am optimistic lending will remain robust, even amid trying economic conditions.
Lucy Waters (née Barrett) is managing director of Aria Finance
This article featured in the July/August 2023 edition of MS.
If you would like to subscribe to the monthly print or digital magazine, please click here.
