Brokers might arrange more than 55% of mortgages, but in the commercial market they facilitate only 17% of deals. Thinktank's Peter Vala explains how to turn the tables
Broker-oriented residential loans accounted for 55.7% of all new mortgages in the September 2017 quarter, according to figures released by the MFAA. However, when it comes to commercial lending, only 17% of deals originate through a broker.
On one hand, the trend confirms commercial loan distribution is dominated by bank and non-bank lenders. On the other, it demonstrates an unparalleled opportunity for brokers to tap.
“There are a number of factors in our view which have most likely contributed to the sizeable disparity,” says Peter Vala, head of sales and distribution at Thinktank.
“We believe the banks have been very effective over a long period of time in positioning themselves to be the go-to source for assistance when it comes to any form of commercial or business finance, and in doing so they have worked hard to retain as much control over their customer relationships as possible.”
This positioning has paid off, particularly as rules around residential lending have continued to tighten in recent months and focus has shifted to other loan types.
ABS data for July 2018 shows the total value of owner-occupier housing commitments excluding alterations and additions was flat in trend terms, while seasonally adjusted commitments increased 1.3%. Meanwhile, the value of total lease finance commitments increased by 3.8% and the seasonally adjusted series increased 1.9%, following a rise of 2.4% in June.
Vala says the process of brokering a commercial deal is part of the reason why broker input in a high-demand sector remains low.
“Commercial deals are often more involved and take longer to come together. Establishing and building a broker business based on commercial has historically been largely confined to ex-bankers and property finance specialists,” he says.
“Brokers and aggregators need to be actively maintaining sufficiently deep and wide lender coverage to cater for the full realm of client needs” - Peter Vala, head of sales and distribution, Thinktank
“The market and lending practices have changed a lot in the last five to 10 years and that penetration is lifting all the time as more and more brokers see the potential and reach into the space.”
Despite the dominance of the banks in commercial, there has been a reduction in lender appetite over recent months – something Vala says is rooted in “greater attention to detail”, specifically with regard to serviceability and compliance.
That isn’t to say credit is difficult to come by – as ABS statistics demonstrate – but the terms around the bank’s new appetite mean it is becoming more expensive in certain situations.
“High-quality credit is still in good demand. However, with strong competition between lenders, the gradient drop has become much more pronounced, with borrowers who would have easily obtained a very keenly priced deal out of banks not that long ago now having to hunt further afield and pay more, even though their underlying creditworthiness hasn’t changed,” Vala says.
Further changes in appetite have even extended to SMSF loan products. Data released by the ATO confirms SMSF investments in commercial property increased almost 47% between 2012 and 2017. However, CBA, Westpac and AMP have all withdrawn their SMSF lending facilities in the last two quarters.
Advising brokers to develop close relationships with their aggregators’ commercial BDMs in order to keep ahead of the developments, Vala adds: “Now more than ever it is vital for brokers to have access to a wide panel of effective and reliable lenders.
“With these trends, and expectations of further changes in lender appetite still hanging in the wind, brokers and aggregators need to be actively maintaining sufficiently deep and wide lender coverage to cater for the full realm of client needs,” he says.
Reversing the trend
As witnessed by Vala, when it comes to commercial deals there are three types of brokers: there are those who refer the deals to another broker; others who have some experience but only take on commercial deals reactively; and those who have a genuine interest in seeking new, commercial business.
Thinktank has taken a proactive approach to plugging knowledge gaps through mentorship and training that offers professional development points, and it also operates an agile sales and credit team, supported by relationship managers.
The focus is to transition the first two types of broker into type threes, and to also tap the potential of the established type-three brokers.
“We work closely with aggregators and industry bodies to bring brokers together in a very interactive way that takes practical, everyday examples of client activation opportunities and illustrates how easy it can be to turn on the commercial solutions switch,” Vala says.
This is backed by a network of relationship managers who are available to provide as much support as required during the transaction. Further, for the type-three brokers this also extends to mentorship and hands-on training, covering such skills as portfolio management techniques. All training is delivered in conjunction with aggregators and other, complementary lenders.
Regardless of the type of broker, when it comes to converting leads into deals the same rules apply in all cases.
“Conversion is all about communicating a deliverable and suitable financial solution,” Vala says.
To do this, he says the first step is to fully understand a client’s needs and circumstances. Secondly, it involves presenting funding options suited to the client’s requirements, and finally, making sure the selected funder is likely to be supportive so as to ensure the probability of a loan approval on terms as high as possible.
Thinktank’s observations relate to commercial lending, which includes finance secured by real property. However, the sector also spans a range of options, from small business and unsecured loans to asset finance, cash flow and debenture-secured lending, construction facilities, and all manner of commercial property loans.
At Thinktank, where the average loan is $659,000, industrial property dominates, with funding also in demand for retail, office residential, mixed and specialised property. Strong demand has also been witnessed from the services and trades sectors, as well as manufacturing supporting construction and infrastructure.
Meanwhile, the individual business sectors demonstrating consistent demand among self-employed borrowers include childcare, student accommodation and boarding houses, education, engineering, financial services, health, IT, general retail, food retail and restaurants, and wholesaling.
Looking ahead, Vala expects the market’s potential to be underpinned by solid economic growth, a continuation of low interest rates, low unemployment, and a positive business expectations and investment outlook for “the next year or two at least”.
What is not certain, he says, is how the finance supply side will play out. Despite this, it’s almost a given that the non-banks will capitalise on commercial lending, just as they have residential, and, as a result, brokers are on track to boost their 17% origination share.
In-house, Thinktank is working on “a number of initiatives”, following a fifth consecutive year of 30%-plus year-on-year growth.
The company has further expanded its national presence across Sydney, Melbourne and Brisbane, and new team members have boosted the head count to 40, with a forecast to reach 48 by June next year.
Another public securitisation will follow in the short term, along with further wholesale funding lines, and there are plans to bring new products to the market in the last quarter. Additionally, heavy investments will be made in a new loan-processing platform to facilitate continued digitisation, and Vala promises a “number of interesting announcements before calendar year end”.