Webinar explains how brokers can get involved
For mortgage brokers working in a crowded home lending market, commercial finance offers new customer opportunities and the chance to expand their businesses.
Non-bank Pepper Money, which offers residential and commercial loans, recently held its first Commercial Insights webinar for 2024 to provide brokers with an update on emerging trends in the commercial and residential market.
Led by Pepper Money national sales manager - commercial Ben McKell (pictured above), the webinar featured Greg Sugars, the national director and CEO of property valuation and advisory firm Preston Rowe Paterson Australasia, and Pepper Money commercial credit assessor Luke Maher.
The webinar was designed to provide a practical guide to commercial lending, with tips on how brokers could help customers with commercial lending and secure speedy decisions on loan applications.
Residential real estate
Sugars spoke about why property was such an important asset and provided an overview of the various markets in Australia.
“To put some context around real estate as an asset class, or property as we define land, buildings and infrastructure, it makes up 70% of the world’s wealth,” Sugars said.
Residential real estate in Australia was worth $10.3 trillion in 2024, increasing $800 billion from 2023. Commercial real estate totalled $1.3 trillion, which had remained relatively stable in the last 12 months.
Sugars said comparing the United States to Australia, the US residential real estate market was valued at $43.5 trillion last year for a population of 340 million people, while for Australia the figure was $10.35 trillion for a population of 26 million.
“Our ratio of people who have investments in real estate is really quite high,” he said.
Commercial property market
Sugars said there was a great opportunity for brokers and the non-bank sector due to a $45bn funding gap in commercial property.
“As a lot of debt becomes ready for renewal and prices have changed due to values softening in the commercial market, there’s a lot of capital being sought to refinance commercial and industrial assets.”
Sugars said the number of Chinese investors in Australian property had slowed down due to difficulties in the Chinese economy and a crisis in their property market.
In Australia, pre-sales were very important for developers, especially as many of the major lenders wanted two-thirds of pre-sales upfront.
“This has put a real dampener on things, so the development market has softened quite considerably and that’s probably going to continue on,” said Sugars.
“We’re seeing that same thing happen in commercial real estate as well, particularly with office values softening.”
Office to housing conversions
Sugars said if the nation wanted more houses, why couldn’t all the empty offices be turned into housing?
The reason it wasn’t happening was due to how expensive it would be to do these conversions, fuelled by a shortage of builders and the higher cost of building in Australia.
“It costs about $6,000 to $8,000 per square metre to convert. In America, that’s about $2,800 to $4,000 Australian dollars to convert office space,” said Sugars.
There were also the challenges of installing services and lowering ceiling heights.
Office values falling
Prime office space was still performing well, said Sugars, but as the work-from-home trend continued more and more people were downsizing their office space.
There had been a big increase in building incentives – while landlords want to keep rent as high as possible “to keep their bankers happy there’s lots of side deals going on in Sydney and Melbourne – we’re looking at about 35% incentives”.
Sugars said there had been a flight to quality office space, with offices classed as B, C and D-grade really struggling at the moment.
Looking at CBD vacancy rates in the six months to January 2024, Brisbane was stable at 11.7%, while vacancies in Adelaide had climbed from 17% to 19.3%; in Melbourne it increased from 14.9% to 16.4%, Sydney to 12.2% (up from 11.5%). Perth was the only improver, with vacancy rates falling from 15.9% down to 1.9%.
Diversification into commercial real estate finance
McKell said he was passionate about the SME market, involving the self-employed and commercial lending landscape, and he enjoyed support the growth of Australian small businesses and commercial customers, which included self-employed mortgage brokers.
He said in a market where diversification was a big topic, commercial real estate represented a real opportunity for brokers.
“We know that mortgage brokers are really doing a fantastic job originating about 70% of all residential loans,” McKell said.
“However, when we look at commercial real estate loans, only about 31% of all those loans are being originated through a broker – it’s an untapped market.”
McKell said plenty of self-employed clients were turning to brokers because some of their needs had not been met by the banks. Brokers had access to multiple lenders available to help self-employed customers.
When it came to diversifying into commercial lending, some brokers were not sure where to start or where to go for help. McKell encouraged brokers to firstly reach out to their Pepper Money BDM.
“But I just want to remind mortgage brokers – you’ve already got the skills to do this,” he said.
“It’s traditionally the same as a self-employed client who’s needing a residential property purchase or refinance. The income assessment is the same and how you analyse the client’s cash flow capacity is the same as well.
“We actually use the same type of financial statements or alternative documentation such as six months BAS or accountant’s letters that we do in our home loans.”
Pepper Money had tailored its commercial loans to make them easy to use brokers, especially those new to the sector, and having the right BDM to support them.
McKell said commercial finance was complex, given all the different types of lending including trade, invoice and development finance.
“However, commercial real estate is your easy entry point into a commercial property portfolio. We’re here to make it easy for you to succeed,” he said.
McKell also outlined a raft of enhancements and changes Pepper Money had made to its commercial real estate loan policies.
Achieving faster approvals
Luke Maher, a commercial credit assessor at Pepper Money, presented some tips for brokers wanting a faster time to yes on loans and these involved eight headings.
Speed to a credit decision:
- Loan submission
- Who is our customer?
- What is the loan purpose?
- Review credit history
- Can they afford the loan?
- Commercial security
- Before submission
- Things to avoid
Each of the eight points had bullet points attached to them. For example, Maher said one of the most important requirements in a loan submission was a broker loan summary.
“We find that loan summary is particularly insightful, particularly for those loans that might be a little bit outside the box, or where there’s a credit impairment evident,” said Maher.
“Pepper is a solutions-based lender, so understanding the story of the client and how we can provide a solution is really imperative.”
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