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Boom time in the commercial sector

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Henry Ejdelbaum is managing director of ASC Finance for Business
Over the past 10 years the commercial mortgage sector has yielded average returns of 13.6%, so it can pay dividends for brokers who play their cards right, says Henry Ejdelbaum

Commercial mortgages are big news. Annual lending to small and medium-sized businesses has reached over £140bn, with 17% growth seen in the sector over the past year alone.

So why are commercial mortgage rates and loans still shrouded in mystery until lenders receive completed applications.

It comes down to the difference between commercial and residential mortgages. The latter are driven by rates and clients' incomes, with valuations factored in line with purchase prices. If clients complete lenders' forms and tick all the right boxes, loans can be quickly agreed.

Commercial mortgages are a different story. Applications are looked at on a case-by-case basis, which slows down the process and confuses the market. Five applicants could apply to buy a commercial property and get five different answers.

Client applications also depend on individual circumstances. For example, are applicants solely dependent on the commercial property for income or will they continue to work elsewhere?

If clients already trade or intend to trade from the premises themselves, they may not be able to provide up-to-date accounting information. So prospective purchasers' income levels can sometimes appear inadequate to afford loans and this can create problems with repayments.

But just because a business doesn't show high levels of profit, it's not the end of the world. Good brokers will know ways to get around such problems and find solutions to fit their clients' needs.

Over the past 10 years, commercial property has produced capital growth and rental returns averaging 13.6% compared with a stock market average of 7.5%. And experienced commercial brokers know lenders' requirements and can smooth clients' routes to the marketplace.

Increasingly, lenders are offering interest-only options for commercial investment properties. This means there are some great deals to be had. Take the example of one of our clients, who wanted to purchase a commercial investment property for £700,000 with a 25% deposit. This property was an industrial unit let to a large electronics company for £49,000 a year.

The rent the property was generating would make many lenders hesitate - they usually look for properties to generate rental cover worth 125% of repayments. A repayment mortgage at 1.5% above the base rate would cost £44,541 a year, so an annual rent of £49,000 wouldn't satisfy most lenders' requirements. But we were able to negotiate an interest-only mortgage with repayments of only £36,750 a year, allowing the deal to go through.

One way for brokers to tap into the commercial market is to outsource their enquiries. The ratio of completions to enquiries in the sector is a lot lower than that seen in the residential market, so if brokers outsource they won't waste time on aborted cases.

And if one considers the high commission that can be received for passing on business to experienced brokers, it's clear there's never been a better time to get involved in the commercial sector.

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