It’s no surprise that everyone would like a shiny glass trophy to show how much they are appreciated by brokers. But arguably, it would be even better if the clients were the ones placing the votes.
If it’s true what the real estate adviser is saying, the commercial property sector may have peaked, and this is when real competitive spirit will start to pay dividends, not so much in awards ceremonies as in securing future business. The risk is that the lending sector starts to hold its own hand a little closer to the flame.
On the face of it, pre-2007 mistakes are largely not being repeated, but that might not be due to business attitude so much as it is due to the relative security of a growing market. Should the commercial property sector genuinely peak, then the only way to grow your own lunch is to eat someone else’s.
We’ve become accustomed to vanishingly low interest rates, and possibly even complacent about them. High loan-to-value ratios look entirely sustainable in the current financial climate. When the cost of borrowing goes up, the situation will change markedly, but the Bank has for a while been pushing the country in the other direction. It does feel as if we’re at least a decade away from a return to 2007 interest rates.
By the end of last year, insurance companies and alternative lenders had grown their respective shares of the market to 16% and 9% respectively. It’s the 9% figure that’s likely to increase during the last quarter of this year, as the alternative funders who are patrons of the NACFB are reporting very strong growth right now.
The market share of the UK clearing banks is forecast to decrease from 34pc of the market in 2015 to 30pc by the end of this year, which compares to a figure of 70pc at the 2008 peak. Measures such as Basel 3 are forcing banks to face up to, and possibly over-prepare for, their increased regulatory responsibilities, which have increased the cost of capital as well as putting the brakes on decision-making.
The risk is that businesses simply take low interest rates for granted and factor long-term plans around them, leaving them unprepared for a return to what we used to consider the norm. Savills went on to project that total returns on all commercial property will fall from 12.9% in 2015 to 4.1% in 2017, before climbing to 7.9% in 2020, with rental growth remaining steady. Take all 2020 predictions with heavy seasoning, though.
Savills also talked about three positive aspects to the commercial property market in 2016: “We’re not overbuilding, nor are we pricing secondary assets as prime, and investors and lenders alike have a heightened awareness of the risks in the market.”
I’m concerned that the last of those points may already be out of date, because the response to heavy regulation tends to be; “This is an overreaction!” As victims of natural disasters know well, bad news stops being bad when it stops being news.
Remember that we are welcoming new brokers who do not actually remember the 2007 crash, because they were pretty well insulated from its effects – they had their heads down at school. The time is not so very far away when 2007-8 will be a chapter in an economics textbook rather than a period that the reader lived through. And we tend to base our contingency plans on our own experiences, rather than those we have read about.
Nevertheless, an increased focus on training and education, and designing courses to hammer home best practice, feel like steps in the right direction to keep growth steady, not only in the commercial mortgage and buy to let arenas, but across all commercial finance.
