Diversifying into commercial doesn’t have to be difficult. Pepper Money’s Malcolm Withers and La Trobe Financial’s Mark Hood discuss their tips for breaking into commercial, the latest market trends, and where to find growth in 2020
Q: Why are more brokers diversifying into the commercial lending space?
Malcolm Withers: I think brokers now recognise that if they are not asking their customers about their diverse needs then someone else will be. Opening the door to additional markets like commercial lending gives them a point of difference that can service these ever-changing customer needs. If we look at the industry over time, there has been a growing gap between what an SME customer wants and what traditional lenders are able to provide. SME clients are looking for a dedicated business banker that understands their business and works with them to help them grow and navigate their finance needs. The banks, however, are grappling with how to deliver this in a rapidly growing SME market, meaning these clients end up dealing with a call centre when they are expecting a personalised service.
I believe this has presented a significant opportunity for a broker to evolve and develop their business to offer more than just mortgage lending. They can bring back the personal relationship a self-employed client deserves by fully understanding their goals, growth plans and where they want to be in five years’ time, and help them navigate the path to achieve this growth.
Mark Hood: The number of brokers diversifying into commercial lending has increased but remains relatively low, with just 20% of brokers writing commercial loans, compared to almost 60% of brokers who write residential loans. Commercial lending appears to represent a great upside opportunity for brokers looking to expand their business and diversify their product offering, revenue sources and client base from which other services can be cross-sold.
“It may sound simple, but the fi rst step is as easy as asking your clients, ‘Did you know I can help with commercial and asset fi nance?’” Malcolm Withers, head of commercial, Pepper Money
We believe a key driver of the shift towards commercial lending is coming from the consumers themselves, who are already strong advocates of the value added by mortgage brokers in the process of sourcing the best available loan, whether that be commercial or residential. Several lenders and aggregators are also focused on assisting more and more brokers to grow their commercial books. With our broad suite of products, which includes commercial products and our highly experienced commercial lending team, La Trobe Financial is helping to educate and guide brokers through the commercial process, enabling them to diversify into this sector.
Q: What does this trend suggest about the housing market, and where will the key drivers of growth stem from in 2020 – residential or commercial?
Malcolm Withers: By diversifying into commercial lending in 2020, brokers will be less dependent on the ebbs and fl ows of the residential property market. SMEs make up 97% of Australian businesses. Whilst they are nimble, dynamic and can move quickly to gain efficiencies or accelerate growth through different business stages, they can also struggle to obtain access to capital to support their changing needs. I see the role of brokers as a vital one in helping their self-employed clients manage cash flow, asset and equipment needs, and their property requirements.
Mark Hood: While the financial landscape remains challenging, we believe there is a unique opportunity for brokers to increase their market share of commercial business, with approximately $15–25bn in unmet commercial loan needs available annually in the market that require broker guidance and non-bank assistance.
We see several growth areas, including:
- Smaller SMEs placing their owner-occupied commercial properties in their SMSFs for investment and tax purposes.
- Office market vacancy rates in some areas are at 10-year lows, with Sydney and Melbourne continuing their strong performance and Perth and Brisbane improving
- Increasing demand for residential dwellings to meet the underlying need for housing driven by population growth. Melbourne and Sydney are likely to be in undersupply towards the back half of 2020, with Brisbane also quickly absorbing excess stock. The ‘build to rent’ market continues to grow, with many developers looking to hold stock on completion.
Q: Just how much growth did commercial lending experience last year? Do you have any figures or stats that express this?
Malcolm Withers: We are excited that brokers have been embracing Pepper’s commercial solutions since piloting in March last year. There is a high awareness of our offering amongst our brokers, and we’ve seen that 45% of Pepper Money accredited brokers have written at least one commercial loan in the last 12 months. The feedback on our commercial lending solutions has been extremely positive, and we’ve established that it is our holistic view of a client, along with our fl exibility and agility, that sets Pepper Money apart. Geeta Kashyap, managing director of GK Finance, is a broker who has been able to support her commercial clients with Pepper Money. She said, “I recently wrote a commercial application through Pepper Commercial. I found the whole exercise very easy, with the lodgement process being very familiar to the residential process. The turnaround time from scenario to application and then approval was super fast, and the team at Pepper were very helpful. I would have no hesitation in using them again in the future.”
Mark Hood: Aside from noting the increase in ‘high-quality customers’ over the last year in smaller development lending, we have seen another shift in small business customers moving away from the banks to the non-bank sector. As the banks undertake their annual reviews, several SME customers are struggling with the changes being made. These changes could relate to industry classifications, or they may require a reduction in LVR. This would require the borrower to make a principal reduction, or a move to principal and interest repayments instead of interest-only, putting more pressure on the borrower’s cash flow. With around $15–$25bn per annum in commercial loans underserved by traditional lenders, there is a sizeable opportunity for finance brokers to promote competitively priced commercial loans and capture a greater share of their clients’ business.
Q: How surprising (if at all) was this growth?
Malcolm Withers: We put considerable thought into the development of our commercial lending business and have been focused on meeting underserved niches in the same way we approach home loan solutions. We wanted to ensure that our products and policies delivered what clients and brokers were asking for: a unique set of solutions to meet all their needs and a lender who could deliver these in a flexible and simple way. We are also working hard to ensure brokers and their clients receive the strong support and high service levels that have become Pepper’s trademark. We understand the emotional roller-coaster ride that many borrowers face while seeking property loans, and we will continue to do our best to make things as simple and stress-free as possible.
Mark Hood: We experienced very strong growth throughout 2019, driven largely by the retreat of traditional lenders from segments of the commercial loans market. The extent of this retreat caught everyone by surprise, including borrowers, which meant there was plenty of demand unmatched on the supply side. This is where larger leading non-banks, foreign banks and credit unions were able to step in to meet commercial finance needs.
Q: How has the rise of nonbanks impacted this trend?
Malcolm Withers: Small business clients are looking for a lender who understands them and makes it easy to do business. They are looking for ease and accessibility so they can focus on what is important to them: running their business. This is where specialist lenders like Pepper Money are powerful. We are flexible and nimble and have a range of policies and products that look at where the client is headed, not necessarily letting their past define what they will do tomorrow.
Mark Hood: Today, consumers are experiencing high levels of uncertainty, low confidence and brand confusion in the finance world, making the role of ‘trusted advisers’ like finance brokers more valuable and in demand. At La Trobe Financial, we are supporting ‘new to commercial’ brokers by providing them with familiar processes and policies to those of our residential products. If they have written residential loans with us, they will automatically be able to transition to commercial.
In addition, brokers can contact our 35 dedicated senior commercial credit analysts and 28 partnership managers for assistance and education throughout the process. We have over 400 staff and some 97 lending credit analysts waiting for your call now.
Q: What tips would you have for brokers trying to break into commercial?
Malcolm Withers: Ask an important question. It may sound simple, but the first step is as easy as asking your clients, “Did you know I can help with commercial and asset finance?” Remember that every self-employed client is a business owner; the opportunity is there for brokers to evolve into business banking brokers and provide the personal relationships SME clients are after. Get to know their leasing schedule: understand the operating rhythm of your client’s business and when any lease agreements are due for renewal. Have a process in place to check in with your client at an appropriate time beforehand to see how you may be able to help them access a better option.
Finally, be curious: ask plenty of questions and really get to understand your client – what drives their business and what makes them successful. In too many cases, a broker will know a client’s finance needs but not actually understand how it will impact their business if they do not access the funding. Without this understanding, many brokers will dismiss specialist lenders as too expensive, when in fact this is not necessarily the case. With a change in mindset comes an enormous opportunity to grow both your broker business and that of your business clients.
Mark Hood: Brokers already have the lead generation tools to make the transition to commercial lending. They should review their CRM database to identify clients who already hold commercial property to see if there is an opportunity to refinance, particularly if clients have held the property for some time. The next step could be to look for self-employed clients and approach them to see if they are interested in purchasing business premises, possibly in an SMSF structure.