Why commercial property lending is ticking along
Commercial real estate lending has continued to grow over the last 12 months* despite increasing interest rates and the ongoing presence of the pandemic.
According to the prudential regulator APRA, commercial property loans held by Australian banks increased by 12% compared to the June 2021 quarter. Total commercial property loan limits were $413.7 billion in June 2022 compared to $369.5 billion the previous year.
Tony Haworth, Director of financial specialist AAP Finance, says ironically, higher interest rates might be attracting some money to commercial real estate. “Returns from lower yielding residential property aren’t as attractive in a higher interest rate environment.
“Commercial real estate typically generates stronger yields. That said, annual lease increases are usually locked into the agreement, while the tenant pays any outgoings.”
Industrial is charging ahead
Based on loan application data from AAP Finance, industrial property is the most substantial cog in the commercial real estate wheel. “Sheds priced between $300,000 – $400,000 are attracting the attention of small businesses such as tradies looking for space to store their equipment,” Tony said.
“Many of these businesses may not have much debt and can purchase properties through different structures such as a self-managed super fund, their own name, or a company name.
“For example, a commercial property could be purchased in a bare trust within a self-managed super fund where it might have more protection from creditors.”
If you can’t repay the loan on the commercial property, then a lender can only claim against that asset and no other asset in the super fund.”
According to Tony, smaller deposits make a commercial property more appealing for small businesses and investors. “In the past, loan-to-valuation ratios of 65%, or a deposit of 35%, were required for commercial property investment.
“Now we are operating with LVRs of 80%, meaning businesses need smaller outlay to buy a commercial property. This factor seems to be making purchasing a commercial property more appealing.
“Of course, the LVR depends on whether the buyer is an owner-occupier or an investment. For example, one of the major banks will accept an LVR of 80% of Up to $3 million, while an investor will need an LVR of 65%.”
Less onerous documentation
Another appeal of buying a commercial property is that the document required by a lender is significantly less demanding than applying for a residential property loan.
Tony explains, “There is less documentation, while the interest rate for a commercial property buyer is the same, whether they choose a principal and interest repayment structure or interest-only.
“In residential lending, the interest charged if you opt for an interest-only structure will be higher than the rate paid if the loan is paid back with P&I payments.
“Lenders offer this arrangement as they understand that using an interest-only structure allows the business to have more cash flow for getting on with growing the business.
“Many small business owners also want to pay off non-deductible debt such as a mortgage before tax advantage debts such as a loan for a business property.”
Other distinctions to buying a home
Another appeal of buying a commercial property is that the document required by a lender is significantly less demanding than applying for a residential property loan.
Tony explains, “There is less documentation, while the interest rate for a commercial property buyer is the same, whether they choose a principal and interest repayment structure or interest-only.
“In residential lending, the interest charged if you opt for an interest-only structure will be higher than the rate paid if the loan is paid back with P&I payments.
“Lenders offer this arrangement as they understand that using an interest-only structure allows the business to have more cash flow for getting on with growing the business.
“Many small business owners also want to pay off non-deductible debt such as a mortgage before tax advantage debts such as a loan for a business property.”
Away from the lending side of buying a commercial property, the sales process will be different, too, says Tony. “Also, the contract will be different as it will outline all the outgoings involved in owning the commercial property.”
Also, expect the settlement periods to be much more extended than the typical 42 days it takes for a residential property to change hands. “Settlements periods for commercial property are more negotiable as they might involve a business changing premises.
“It could be 90 – 180 days if it involves moving machinery.”
If you would like to find out more about applying for a commercial property loan, call AAP Finance today on 1300 141 453.
