Commercial property remains on firm footing

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Despite rising interest rates and inflation, commercial property is performing well, and Thinktank says it’s a good time for brokers to assist their customers in this sector

CHALLENGING CONDITIONS have taken a toll on the residential property market over the past 12 months. Property prices have fallen, and there are fewer buyers around in the wake of rising interest rates, the higher cost of living, and lower borrowing capacity. But what about the commercial property market? A Herron Todd White report for the month of February revealed that higher interest rates were having an effect: yield on commercial property had compressed by between 50 and 100 basis points. The report states that industrial funds, real estate investment funds and property syndicates were retreating somewhat due to difficulties in predicting cash flow and investor returns.

Thinktank is an independent non-bank financial institution specialising in the provision of commercial-property mortgage finance of up to $4m and residential-property mortgage finance of up to $2m in the Australian self-employed, PAYG and SME sectors. Since 2006, Thinktank has provided over $6.5bn worth of commercial, residential and SMSF lending solutions, which have enabled thousands of borrowers to achieve their goals of acquisition, refinancing and equity release. Thinktank offers a range of lending solutions, including Full Doc, Mid Doc (alternative income verification), Quick Doc and SMSF loans.

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“With most sectors of the smaller end of the commercial property market remaining relatively sound, now is a good opportunity for brokers to cement their relationships with their clients by reviewing existing lending arrangements”

Peter Vala, Thinktank

But demand for industrial assets remained strong, particularly in the sub-$10m owner-occupier market. This aligns with non-bank property lending specialist Thinktank’s own comprehensive monthly data showing this sector of the market continuing to perform well. Thinktank general manager partnerships and distribution Peter Vala talks to MPA about the ongoing strength of commercial property and the opportunities for brokers to participate in this lucrative space.

Vala says Thinktank concentrates on the market for small to medium-sized commercial property with values up to $5m. “From our first-hand experience, this has remained relatively stable to date, due to its diverse nature and role in the economy,” he says. “This is reflected in our monthly property market reports which track the state of the various segments and our short-term outlook.” These reports show that while residential has been adversely impacted by economic conditions, key commercial sectors such as industrial are continuing to perform strongly. “We’ve seen this play out with warehouses and factories which are holding firm with little vacancy, to the point that demand continues to outstrip supply in some cases,” Vala says.

The current market conditions (and flow-on impacts from the pandemic) have also resulted in variances within the property segments themselves, he points out. For example, in retail it’s been noticeable that foot traffic and consumer demand in suburban environments has significantly increased. “This is likely due to the trend that’s been emerging since 2020 for flexible work arrangements, coupled with businesses capitalising on these settings. However, some CBD outlets have experienced the opposite, with workers and shoppers still not returning to pre-pandemic numbers.” Vala says commercial properties worth $10m and above are starting to show signs of pressure on values, particularly across office and retail, with the relativity of longer-term interest rates playing a greater role in underlying value and investment yields in these areas. “Land bank and development sites are also under pressure from higher interest rates and the effects of inflation on construction costs and eventual returns.” Brokers wanting to see more detailed breakdown of how various residential and commercial sectors are performing across Australia can download Thinktank’s monthly market focus from its website.

Vala says the challenge of rising interest rates and escalating living and business costs is leading many borrowers to proactively address their financial positions by minimising debt and improving cash flow – and this is particularly relevant to the self-employed. “With most sectors of the smaller end of the commercial property market remaining relatively sound, now is a good opportunity for brokers to cement their relationships with their clients by reviewing existing lending arrangements.” This may be as simple as restructuring or refinancing a current loan to remove regular reporting requirements, such as annual reviews and revaluations, or extending terms and consolidating debts to free up cash flow, says Vala. “All of this can be achieved within a Thinktank loan, taking advantage of our set-and-forget facilities and 30-year terms.” Another area of opportunity is within the SMSF space where Thinktank has seen constant demand for commercial property using SMSF structures. Vala says these are useful both as part of long-term wealth creation strategies (under professional advice) and asset protection. “Most requests we see are for commercial properties purchased utilising an SMSF limited recourse borrowing arrangement where an associated entity controlled by the fund members leases the premises from which they can operate their business.”

“Our RMs are hands-on, workshopping every aspect of the transaction with the broker to identify key risk areas that may need to be mitigated before submitting a transaction for approval”

Peter Vala, Thinktank

For commercial property, Thinktank offers Full Doc, Mid Doc and Quick Doc loan products with LVRs of up to 80% and a $4m maximum loan size, as well as 30-year loan terms and set-and-forget benefits – this means no revaluations, annual reviews, regular covenant reporting or ongoing fees. Vala says these combined features make Thinktank one of the most competitive, flexible and innovative lenders in the market. This is further highlighted by the following commercial loan features:

Almost 70% of residential loans are introduced by finance brokers, but when it comes to commercial transactions, the percentage involving a broker is estimated to be half of this. Vala says that with the proven stability and performance of commercial property there is significant opportunity for brokers to diversify and grow their businesses in this sector by providing value-added solutions for their existing residential clients, who will in all likelihood also introduce new referrals over time.

Broker and clients discussing commercial property values

State of the commercial property market

Products, value proposition

Published 10 April 2023

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Opportunities for brokers in 2023 and beyond

Mid-Doc (self-verification) loans up to $4m – most other lenders have significantly lower limits 80% LVRs for loan sizes up to $2m, for both Full Doc and Mid Doc products Can assist with an additional 10% by funding the GST portion of a purchase Option to switch from Mid Doc to Full Doc at any time, without any cost, should the borrower’s up-to-date financials meet the Full Doc servicing criteria SMSF loans with no liquidity requirements; projected contributions are taken into consideration on new and existing SMSFs to support servicing

Thinktank also specialises in complex borrowing structures such as unit trusts, tenants in common and in-specie transactions.

Vala says Thinktank’s relationship manager model provides brokers with one point of contact from the first meeting through to settlement. “Our RMs are hands-on, workshopping every aspect of the transaction with the broker to identify key risk areas that may need to be mitigated before submitting a transaction for approval. “We are here for the broker and borrower. With Thinktank there is no credit scoring or auto approvals, meaning we assess all applications on their own merit.” Thinktank prefers to avoid cross-collateralisation security to

Assistance for brokers

keep transactions as simple as possible, says Vala, which also means that if the partial unwinding of financing is required, the process will be easier. “Finally, if we can’t assist with the transaction, we’re more than happy to suggest an alternative provider that may be able to assist. At the end of the day, we are here to help brokers get an outcome for their clients.”

Diversification for growth

Commercial property market stays strong

Residential and commercial property sectors – Thinktank ratings, Mar 2023

SYDNEY

Fair

Weak

Strong

Stable

ADELAIDE

Good

Fair

Good

Strong

Stable

MELBOURNE

Weak

Fair

Weak

Strong

Declining

Stable

BRISBANE (SEQ)

Weak

Fair

Good

Declining

Stable

Improving

PERTH

Good

Fair

Good

Stable

Improving

Sources: Thinktank (sourced from ABS, ACCI, AiG, ABS, AFR, ANZ Research, ATO, CBA, CBRE, Colliers International, CoreLogic, Cushman & Wakefield, HTW, IMF, MSCI, JLL, Knight Frank, OECD, PCA, Preston Rowe Patterson, RBA, RLB, Savills Research, Westpac Economics, World Bank)

Resi-Homes

Resi-Units

Office

Retail

Industrial

Commercial property market stays strong

Residential and commercial property sectors – Thinktank ratings, Mar 2023

MELBOURNE

Fair

Weak

Strong

Declining

Stable

BRISBANE (SEQ)

Weak

Fair

Good

Declining

Stable

Improving

SYDNEY

Fair

Weak

Strong

Stable

Resi-Homes

Resi-Units

Office

Retail

Industrial

ADELAIDE

Good

Fair

Good

Strong

Stable

Resi-Homes

Resi-Units

Office

Retail

Industrial

PERTH

Good

Fair

Good

Stable

Improving

Resi-Homes

Resi-Units

Office

Retail

Industrial

Source: Thinktank; MSCI December 2022 update for Australian commercial property markets