Although many people have claimed, retrospectively, to have predicted the Great Financial Crisis (GFC) of 2007–09, only a relatively small group actually saw it coming.
One of the latter was economist and lecturer Nouriel Roubini.
However, instead of receiving praise for his foresight and intuition, he was given the nickname ‘Dr Doom’ in the media on account of his inclination to predict a downturn.
This is a recovering and potentially lucrative market
That moniker remains even today.
Since then, a host of mini Dr Dooms — or ‘permabears’, in economics slang — have sprung up, ready to pronounce the death of any market that even threatens to wobble.
But the thing with permabears is that, while they are sometimes correct — as Roubini was about the GFC — other times they are very wrong. It feels a bit like that with the commercial property market at present.
There’s no denying that the past few years have been tough. The shift to home working has led to a lot of suffering for both commercial landlords and the thousands of firms around the country that rely on the custom of commuters.
At one point, it seemed as though the traditional ‘9 to 5’ that had long been a part of our work culture had been consigned to the history books.
About-turn
But things are changing. Slowly but surely, workers are returning to the office. Nowadays, it’s common for firms to insist on workers being in the office at least three days a week. Some of the biggest firms in the City are even stricter, requiring employees in certain divisions to come back into the office full time.
The commercial sector is dominated by challenger banks, with very few non-bank lenders
In the medium-to-long term, the slow reversal of the work-from-home trend will have positive ramifications for the commercial property and mortgage markets. Participants sense this and, as a result, protestations that the commercial property market is in long-term decline are becoming rarer. In fact, some market observers — myself included — are relatively upbeat about the market’s prospects.
According to a large share of respondents to the Royal Institution of Chartered Surveyors’ latest Commercial Property Monitor, the market “has reached the bottom of the current cycle”.
Separately, 72% of commercial property developers/landlords surveyed recently by Together, the lender, felt optimistic about the outlook for their business.
Respondents also predict that the commercial lending market will rise by 32% to around £118bn in the next four years.
Slowly but surely, workers are returning to the office
If this increased optimism is warranted — and, for what it’s worth, I think it is — it’s only a matter of time before we start to see an uptick in demand for office space. That will push up prices and result in greater market activity.
In short, there is opportunity in this market. Anecdotally speaking, I get the sense that the commercial market has been identified as an area of growth for many lenders.
A lot of those lenders that do operate in the commercial market also have a presence in buy-to-let (BTL). However, the trouble with the BTL market is that it is saturated. It has shrunk more than 50% over the past year, according to UK Finance, yet the number of lenders operating in it remains largely the same.
Therefore, they are all fighting for a piece of a much smaller pie. And, when that happens, you have two choices: cut your rates and resign yourself to lower margins; or move up the credit-risk spectrum, which can make lenders uncomfortable.
The slow reversal of the work-from-home trend will be positive
The commercial sector is far less competitive, so margins tend to be higher. It is also dominated by challenger banks, with very few non-bank lenders.
There are good reasons for that, of course, the main one being that it is a highly complex area of lending that requires specialist expertise.
However, there is a huge opportunity for enterprising non-bank lenders that want to diversify their revenue and make a splash in a recovering and potentially lucrative market.
Lucy Waters is managing director of Aria Finance
This article featured in the May 2024 edition of MS.
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