​Commercial lending: The next big opportunity?

by Adam Smith25 Sep 2014
While the residential market has been red hot of late, commercial has been tipped as the next big opportunity for brokers

Brokers could be forgiven for focusing solely on the residential market over the past couple of years. The Australian property market has recovered strongly from the GFC, and residential demand in many capital cities has been red hot over the past six months. But as house price growth begins to level off and residential demand returns to calmer levels, commercial demand appears set to take its place as the growth area for brokers.


While consumers have been shaken by the Federal Budget, leading to dismal confidence and more hesitance to purchase property, business sentiment has remained relatively robust. The Colliers International Office Demand Index has demonstrated this, with businesses enquiring for a record amount of office space in the June quarter.

Australian First Mortgage director Iain Forbes said with record-low interest rates, it’s little wonder the demand for commercial property is rising. “Rental income is attractive, and in most commercial leases the tenant pays the outgoings. It is certainly growing and AFM have seen an increase in commercial lending,” Forbes said.

Liberty Financial general manager of commercial finance Suresh Pillai agreed, and said the lender is seeing an influx of commercial customers.

“We continue to see more and more small businesses that have not been getting a fair go from their banks because their needs are quite customised. We are also seeing strong growth from mainstream customers looking for a more flexible alternative to bank funding at comparable rates,” Pillai said.

Moreover, as self-managed superfund borrowing gains popularity, Thinktank head of sales and distribution Peter Vala said many business owners are looking to move from leasing their premises to owning.

“It makes a huge amount of sense for business owners to acquire property in an appropriate structure and set themselves up for longer term real wealth creation, right through into retirement. Despite some geographic and microeconomic pockets where commercial property is still struggling to overcome high vacancy rates and structural change, we more broadly expect to see an ongoing lift in the health of the sector and increasing opportunities for brokers,” Vala said.

And it’s not just the commercial market itself that’s growing, according to Macquarie Business Banking’s head of partner origination, Brian Steele. Steele said broker use in the commercial borrowing sector is seeing significant growth.

“The main reason for this is that borrowers are more aware of the broker proposition and it has become more appealing for them. Historically brokers focused more on mortgages, although there are now more who have diversified into commercial lending. The availability of products and the choice of lenders for borrowers has led to a significant increase in share of broker wallet in the commercial space,” Steele said.


Regardless of the opportunity, many brokers have passed by commercial lending. Forbes said this is due to the idea that commercial lending is too complex.

“The most common misconception is that commercial is difficult, and some brokers do not understand commercial lending,” Forbes said.

Pillai argued that the stereotype that commercial deals are byzantine and complicated is often inaccurate.

“Whilst some commercial deals may be more involved than a standard residential loan, there are a range of commercial offerings that provide a simple and swift solution. With about one in five Australians being self-employed or running small business, the opportunities in commercial lending are significant,” Pillai said.

Wells said brokers may believe, for example, that the financial analysis for serviceability is more complex for commercial deals than for residential.

“It can be, but for many deals it shouldn’t need to be. One solution is using alternate verification to step through this. That is not typically a bank solution but specialist lenders exist to provide this solution. Another example is the misconception that, if you encounter a multiple entity structure, this means a complicated solution across entities and multiple guarantors. Again this needn’t be the case. Simple structures offering targeted security are available, not requiring extended ‘lock ups’ across the structure. Again brokers may need to look beyond banks for these standard solutions,” Wells said.

In addition to complexity, commercial deals often have a reputation for being protracted. Again, Steele said this is not often the case.

“Within the broking industry there is often a misconception that the deal origination process for commercial lending is long. For a successful commercial lending process, brokers can manage it well by understanding the process and gathering all the relevant information upfront from the client,” Steele said.

Many of these misconceptions are easily dispelled, Vala said. He urged brokers to attend professional development days to assist them in identifying and subsequently converting commercial opportunities.

“This is something we have been doing a lot of right around Australia over the past year or two. A commercial deal can also be brought together quite quickly and efficiently with the right input and assistance from the lender so it is a case of getting aligned with lenders you know you can turn to when you need them,” Vala said.


For brokers looking to break into commercial lending, Steele said education is key to grasping the opportunity at hand.

“From the outset it is important for brokers to gain a solid understanding of the opportunities and the potential pitfalls of commercial lending. How brokers approach commercial lending is the key to success in my view, with knowledge and understanding setting a solid platform that everything else can be built upon. The deal origination process, including the information requirements and the flow of the process, is not as predictable for commercial lending as it is for residential. Given this, brokers need to be aware of what is expected throughout the process so they can manage client expectations accurately and smoothly,” Steele said.

Wells added that brokers should make sure they have a firm grasp of the products on offer, and the types of borrowers suited to them.

“Confidence based in some product knowledge also always assists. But for simple deals the good news is that knowledge can be readily developed, for example talking to any of other brokers, mentors, your aggregator, or lender BDMs that you know who bridge both residential and commercial lending. Specialist lenders should bend over backwards to assist a new broker bringing them a deal. Even if the deal is a little more complex, with a bit of support from these same sources, you can rapidly accumulate the skills required to get the first deal at this level under your belt,” Wells said.

Vala said there are three key pieces of information brokers need to grasp. First, he said they must understand the details and characteristics of the security property – what it is, where it is, its condition, occupancy and rental income. Second, he said brokers must know the parties involved in the loan and how they relate to each other. Finally, he said brokers must have a good grasp of serviceability, and where the net income to service the loan is coming from.

“These requirements work along the same lines as residential lending, and while there often is a bit more detail that enters into any given deal, the fundamentals remain very similar,” Vala said.

But any gaps in knowledge can be addressed with the proper help, Pillai said.

“Given the breadth of Liberty’s product range, we often help brokers who have been promised the world only to be let down. My tip would be to work with BDMs who have proximity to the decision makers and who are willing to champion the deal for you,” Pillai said. 

And Forbes said brokers can speed the process along by ensuring they have all the information the lender needs upon submission of the application.

“Complete the application form fully, and send all the supporting with the application. Avoid submitting bits and pieces. This only delays the process,” Forbes said.


While commercial lenders are quick to talk up the opportunity and dispel myths surrounding the sector, they also concede that there are aspects of commercial lending of which brokers should be wary. For Vala, it’s being wooed by a deal too big and complex for anyone but a specialist.

“One thing to really be wary of is the attraction of the big deal. For any transaction above $2m, take a step back and really analyse what the opportunity is, how likely it is to actually come off and what will be involved in getting it over the line. The strike rate on the larger deals for anyone other than the real specialists in the area is very low and you are probably better advised to focus attention on multiple smaller resi and commercial transactions that can be accomplished in a more manageable timeframe and produce a similar pay off,” Vala said.

Wells pointed out that, despite understanding the key issues involved in commercial lending, brokers can often find themselves waiting for lenders.

“The key points in our view for commercial loans are to understand the structure, servicing and valuation. If a broker has a decent grip on these issues they have the most important bases covered. Brokers, however, can find themselves in limbo for extended periods in some credit departments dealing with these fundamentals. Often a specialist lender who can step through these offers the ‘occasional’ commercial broker a much faster and easier path to settlement, allowing them to keep moving with their broader business,” Wells said.

For Steele, however, almost any pitfall can be overcome by education. He urged brokers to learn the ins and outs of commercial lending, saying knowledge can stave off most potential problems.

“Knowledge is really key in the commercial lending space and the biggest potential pitfall is having a lack of it. Ensure you understand the process and information required, discuss it upfront with the lender and communicate with your client to manage expectations,” Steele said.

This article is from Australian Broker Issue #11.16. Download the issue to read more!