Challenges of Commercial Property Finance in 2022

Posted by The Landsite on 6th September 2022 -

A positive economic backdrop at the start of 2022 was a good sign that the commercial property sector was looking at a strong recovery following a tumultuous two years. But it still isn't without its challenges; with UK inflation reaching a new 40-year high and the cost of living crisis – what is the impact on commercial property finance? 

We asked some of The Landsite members and industry experts what challenges they think businesses are facing. 

The most significant challenge for the whole economy in 2022 is spiralling inflation, and the rising cost of living will impact all businesses as consumers tighten their belts on discretionary spend in order to meet their commitments. However, experienced lenders will not use this as an excuse to reject applications, but instead, work with clients to identify the most suitable finance solutions to meet their requirements." Jonathan Rubins – Director, Alternative Bridging Corporation.

Rising costs vs demand

Lender concerns over affordability present a serious challenge, but while interest rate rises are a concern, borrowers and lenders are seemingly taking this into account. Plus, the undersupply of UK housing and the evening out of construction costs means that the industry expects to see more, not fewer, property developments. 

According to Pete Davies, Head of Lending – Salboy Build Partner, "The construction industry is facing a number of pressures from cost inflation and changes effecting supply changes impacting labour. It's more important than ever to have the correct back and support in place to access what's required to deliver new build schemes. Despite these challenges, the property market remains buoyant and stable despite an unprecedented level of changes over the last 2 years. So if you can build homes, people still want to live in them."

While the outlook for the economy is uncertain, the demand for commercial property finance has not decreased. The evidence suggests that it is an exciting time for commercial landlords and property developers with their finger on the pulse. 

The ongoing effects of Covid-19

The past two years have radically changed how we work and live. Businesses are investing in higher quality commercial properties to suit hybrid working, where office spaces are now more about collaboration and interaction. Sustainable and tech-enabled buildings are becoming standard requirements. E-shopping has given rise to the need for vast networks of storage spaces in strategic locations – repurposing old buildings and warehouses. And the changing nature of the high street is increasing demand for property conversions from commercial to residential and vice versa.

Currently, the biggest challenge seems to be not whether property finance can be acquired but how quickly and at what cost. 

Paul McGonigle, CEO of Positive Lending comments "the biggest obstacle facing the sector at the moment is not the availability of finance but the speed and cost in which it can be acquired. The continuous increases in base rate to try and control an inflationary recession has created panic. Consumers are running to lenders and brokers trying to secure finance as costs increase, which is now creating huge backlogs of applications for lenders to process, surveyors to visit and brokers to work through. Lenders are being forced to increase their rates and the deadlines set to capture the original rate are almost impossible to obtain due to the timescales in processing the cases. The products are almost unobtainable from the moment the clock starts ticking for offer deadlines. Until the market steadies I do not see a change in this behaviour, which I would anticipate to continue until Spring 2023."

This is supported by BloomSmith who state that "The hangover is in pubs, clubs, restaurants, offices and retail. The demand pressure is for residential supply and distribution. This is creating transactional volume and sellers want fast, certain money. Ironically, BloomSmith is seeing most of its more recent referrals coming from those sellers, (not directly from the buyers or buyers brokers), who recognise the value of us providing 20% of the cash required to help complete their deals, fast and with certainty."

Support for property developers 

A recent Royal Institution of Chartered Surveyors (RICS) survey said that 43% of its quarterly commercial property survey respondents thought the sector was in the early stages of a downturn. A further 10% thought it was in the middle of one. By contrast, three months ago, 53% said the sector was in the early or middle stages of an upturn, a proportion that has now slumped to 22%.

RICS economist Tarrant Parsons said, "Given interest rates are set to rise further from here, it appears the market may be at a turning point." 

Tougher credit conditions make have dampened momentum in investor activity, but the challenges faced could be alleviated by lenders. With current market conditions impacting developers' ability to complete projects on time and on budget, the support of lenders that recognise the need for speed and flexibility will be essential. Particularly given the varied scope and complexity required for commercial property finance, lenders need to be looking at offering creative, customised solutions to support developers.

"Flexibility from lenders is going to become so, so important in the months to come. In the current climate, using rigid tick-box methodologies will fail to serve the needs of property buyers. Rather, lenders must demonstrate a little more creativity in how they assess loan applications; they must endeavour to tailor their products and services to the needs of the individual borrower; and ensure they take a view of the bigger picture as far as affordability checks are concerned. Due diligence and rigour will, of course, be vital, but there is still room to adapt process and keep lending." Market Finance Solutions.

 

Explore more articles from us in TLS Insights September edition.