What’s wrong with commercial property finance today?

Financing commercial property is difficult and costly work.

It’s a long, expensive, arduous, error-prone and paper-dependent process for property owners. It is a process with little transparency for the owner who struggles to provide the information required by the prospective lender. When the owner receives loan proposals from prospective lenders, they find it impossible to do an “apples for apples” comparison between these offers and decide on the best deal. Most experienced commercial property owners will tell you the financing process for commercial real estate is “broken”.

Is there a better way?

Commercial property is one of last bastions of business where digital technology has only recently started to take hold and has had relatively little positive impact. Imagine applying to commercial property financing some of the principles and tools we are familiar with when shopping for a new credit card or looking to finance or refinance a home loan. Why shouldn’t you – as a commercial property owner – be able to shop around in a similar fashion with similarly convenient tools for a commercial loan, regardless of the loan size and the number of properties attached to the loan? Why should you be tethered to the one or two lenders that you’ve always dealt with (begrudgingly…), where you feel you have no other options apart from lenders similar to your current lender/s? Are there other lenders out there somewhere, both traditional and non-traditional, local and abroad, who might be worth considering and potentially a better match to the your specific needs?

 

There is a better way.

Financing commercial property today

The ability to source loans is difficult for borrowers, with little transparency at any stage of the financing process. Arranging a loan has historically been an entirely relationship driven exercise dominated by a relatively small set of incumbent lenders, primarily large banks. Each loan financing, including refinancing of the same property, requires the same laborious due diligence and legal work to be endlessly repeated, normally at the borrower’s cost.

Today, the loan financing process is still mostly manual, hugely inefficient, costly, and a “dinosaur” in terms of modern 21st century business practices. The relationship driven service model has been viewed as a competitive advantage for lenders whose pricing is opaque to the borrower, as lenders seek to maximize returns from borrowers. This is hugely inefficient and costly for all of the parties involved in the financing process, including lenders.

Borrowers typically have little price transparency during the financing process and find it hard to compare pricing from one prospective lender with that from another lender. Lenders on the other hand struggle to find prospective borrowers who match their market, lending and risk criteria. Lenders also struggle with the time, cost and level of manual effort involved in the financing process together with the complex and expensive documentation they need to generate as part of the process. Loan syndication – the process where a lead lender arranges multiple lenders to finance a single loan given the large size of the loan amount – remains a complex and manual undertaking to set up and manage.

The challenges property owners face

The financing process for a commercial property loan typically takes 5 to 9 months to complete. This is a significant proportion of the property owner’s time taking them away from the value-adding work that helps them drive their business forward and which they much prefer to be doing. To finance their property, the owner needs to apply for the loan filling in the necessary paperwork, negotiating a non-disclosure agreement (NDA), providing highly detailed information for lender due diligence including all property information (title, insurance etc.), financial data, commercial information (tenant list, leases, lease contracts etc.), they then need to compare the few loan proposals they receive, negotiate a deal and settle the loan.

80% of commercial property loans are refinanced every 3-5 years. In the UK, as of June 2019, 78% were to be refinanced in the next 5 years, up from 73% in 2018, demonstrating an increasing need for refinancing of commercial property loans.

With each refinancing of the same property, most due diligence exercises are repeated. The same information that was previously provided by the property owner has to be provided again – from scratch. This includes getting the NDA in place and providing basic property /ownership information/documentation, legals, valuation data, building surveys, environmental surveys, ordinance surveys etc.

One early component of the financing process – the NDA negotiation stage – is a case in point taking several weeks to complete (6 weeks is not uncommon) as property owners are so concerned about data privacy and worried that data about their property and its commercial / financial position will be potentially misused.

Throughout the financing process, the property owner is not typically sure what stage the process is at, what steps are fully completed and what immediate steps come next.

When it comes to loan pricing, property owners find they are at the mercy of a small pool of large incumbent lenders hoping they will deliver truly competitive offers. Once the owner receives a loan proposal, it is very difficult for the owner to determine the pricing approach used by the lender and to identify: a) what is the total upfront cost and b) what are the total ongoing costs.

A key reason for this lack in price transparency for the property owner is because lenders typically price their loans using a ‘whole of wallet’ strategy where the lender calculates the overall value of the borrower to their lending institution across multiple services, products, and account types before determining the loan proposal pricing.

The overriding concern of the property owner is to simply get the best price with reasonable and fair terms and conditions.

A well-known family office in Australia with over AUD$2 billion in commercial property assets under management described their experience in refinancing a AUD$300 million property loan with a major Australian lender as follows:

“Many weeks until any response [from the lender]. They were reluctant to finalise with no transparency in price or process…it took 9 months to complete the deal”

A better way to finance commercial property

Property owners need an easy way to find a pool of lenders who are likely to offer them an attractive loan deal irrespective of the size of the loan and they need a quick, easy, objective and secure way to compare the loan offers, select the best deal and finalise the loan.

The consumer space has proven that marketplaces coupled with appropriate digital automation are a powerful way to introduce better transparency, competition, value and step-change expediency into a market as well as better access to an extended supply base.

What commercial property owners need is a secure place for them to keep their property data up-to-date with digital access to a global commercial property financing marketplace. This financing marketplace should ideally automatically match up their loan requests with the best suited lenders and it should provide appropriately designed digital workflows that significantly speed up the financing process from shopping for a loan, to selecting a loan offer through to finalising the selected loan. The marketplace should also make it easy for the property owners to track and analyse their portfolio of property loans, to opportunistically “go shopping” for a property loan or to be proactively notified of any loan deals that may suit criteria that the property owner has previously specified.

Alternative lenders are now becoming more prominent in key commercial property markets, including the UK, Europe, North America and APAC. Commercial property owners are becoming more aware of these players as an increasingly viable lending option. These alternative lenders include insurance companies, pension funds, private equity firms, fund houses and others. In 2008, only 5% of commercial property lending in the UK was provided by alternative lenders. Alternative lenders now account for about 25% of UK commercial property loans – a very significant increase.

Combining a secure digital commercial real estate financing marketplace with access to a broad lender pool, made up of both traditional and alternative lenders, creates a uniquely powerful financing solution for property owners in a global marketplace of USD$22.2 trillion of investable commercial property.

Property owners are able to secure their property data in one place, can access a much wider and diverse pool of lenders, are able to more objectively and transparently compare pricing, terms and conditions from loan offers they receive. When refinancing their property, they don’t need to re-specify details they’ve previously provided.

The financing of commercial property today is a slow, drawn-out, costly, non-transparent and highly manual process where property owners struggle to find a good deal. A secure global commercial real estate financing marketplace with access to a diverse pool of lenders is the solution property owners have been waiting for.

Leon Koutsovasilis – CTO of Lendhaus