New kids on the block in commercial property financing are here to stay
When anything crashes and burns, there is often something that rises from the ashes. Since the economy emerged from the other side of the global financial crisis, that something has been a range of new players willing to finance commercial property investment and development – and they are here to stay.
The pincer movement of a low base rate, encouraging investors to look elsewhere for returns, and conservative lending practices in the larger banks, meaning smaller businesses are searching for alternative sources of finance, has created both the demand and supply for these property funding opportunities.
On a simple level, this has been a profoundly positive development in the sense that the whole market needs to be serviced. In Scotland, although a relatively new phenomenon in comparison to south of the border, the main beneficiaries have been Edinburgh and Glasgow with new developments coming to fruition more quickly. Buoyancy in the commercial property market is usually a proxy for overall positive economic growth – a core reason why you’ll see so many Chancellors of the Exchequer in hard-hats and hi-vis clothing.
The positioning of these new funding products has been clever, nuanced and quite deliberate. Pitching themselves as a stepping stone to bigger and more sustainable funding, challenger banks and peer-to-peer lenders (where loans are provided to borrowers by lending ‘platforms’ on behalf of groups of investors) are offering quick decisions on short term bridging finance over 3-12 months, development finance packages over 9-18 months linked to specific building or refurbishment projects and traditional commercial mortgages.
When used correctly, short term bridging finance is a useful tool for property investors and developers and can be used in a variety of contexts – to allow an opportunistic purchase, to buy time whilst waiting for a planning consent to be obtained or more affordable funding to be lined up.
These types of funders are often prepared to finance more unusual or creative types of developments and may also be willing to look at schemes out with the traditional central belt locations in Scotland. Many developers see the ability to build something, albeit with higher finance costs, and move on to the next project as much preferable to seeing their project stymied while they seek out cheaper options.
It should be noted that, as with any new emerging market, there have been casualties as well as success stories and some lesser known peer-to-peer lenders have failed. Investing in these types of entities does not come without risk and careful thought should be given to finding the right platform to invest in or to borrow from. Investments in peer-to-peer platforms are also not protected in the same way savings would be with your bank.
These lenders try to differentiate themselves by the use of technology to allow quick turnaround times but there is also a human touch with direct dialogue between the lender and the borrower to address any concerns, avoiding the ‘tick box’ mentality.
The new kids on the block have quickly become part of the mainstream commercial property financing conversation, with many larger banks developing strategic partnerships with such funders on the understanding that they play this slightly different “stepping stone” role.
As a relatively new and competitive market in Scotland, it is widely recognised as profitable and a win-win for investors and entrepreneurs when operated correctly. The lack of heavy-handed regulation to date has allowed this market to find its feet and adapt. The quid pro quo for this sort of funding has to be nimbleness and flexibility for slightly more expensive money.
From a commercial property perspective, more developments are being built, faster, with distribution of risk and with more opportunities for smaller businesses with different ideas. These are new kids on the block that are here to stay.
Gavin Buchan is a Partner in Lindsays’ Commercial Property team