The Commercial Mortgage Market

Read time: 10 mins

The commercial mortgage market has experienced significant shifts in the past year. We explore current appetite and opportunities and discuss how we are supporting clients.

As we emerge from lockdown, it’s fair to say that the commercial property market looks very different compared to just over a year ago.

On a positive note, overall, the market is buoyant, driven in part by the Stamp Duty holiday which ended on 30 June, and saw a huge appetite from clients to complete on deals in the first half of the year.

So far in 2021, we’ve seen the market grow exponentially, and we’re continuing to lend in advance of levels from last year and even pre-Covid.

Changing priorities

What we are seeing, however, is a shift in terms of what clients are looking for and prioritising. For example, the retail and office space markets are constrained, but we are seeing investors in these spaces beginning to diversify and converting shop and office space into residential properties or focusing on mixed-use developments which combine living, working and retail spaces.

The transformation of the high street, which began long before Covid, has been accelerated by the pandemic. Retail focus is shifting to out-of-town parks which thrived during lockdown, and over the next year or two we’d expect to see what the high streets of the future look like being defined, and what the mix of retail, commercial and leisure properties will look like.

We’re also seeing a number of areas which have been very static over the past year come back to life, including the student accommodation market, which virtually ground to a halt in 2020 due to lack of demand. Historically it’s always been an area which has provided good yields and returns, and clients are keen to return to these solid grounds as the country opens up.

A regional focus

As well as changes to the types of properties people are investing in, there have been significant shifts in the areas we are seeing inquiries about. Now people have the flexibility to work from anywhere, we’re seeing hotspots developing around the country. University towns remain popular, but we’re also seeing growth in the southern coastal towns, whereas traditional commuter towns aren’t seeing as much growth as we’d have previously expected. Proximity to a railway station isn’t as important as it once was, and property developers are branching out accordingly.

Challenging times

But while there are a number of positive changes in the commercial property market, it’s not without its challenges at the moment.

Within the development space, there's a shortage of quality opportunities and really good development land is in high demand. When something does become available, there are often quite a number of clients looking to gain the same land, creating a lot of competition.

A number of materials are also in short supply, including glass and cement for example, which has the potential to impact on timescales for delivery of projects. The full impact of this isn’t clear yet, but it is definitely something to watch and be aware of in the coming months.

A focus on sustainability

A real positive to come out of the pandemic is the increased focus on sustainability and a desire to ‘build back better’. We’re seeing a growing appetite among clients to invest in greener properties and we’ve taken a number of steps to help support them with this.

All our colleagues in the Real Estate team are undergoing training on climate change and sustainability-related risks and opportunities with the Cambridge University Institute for Sustainability Leadership, so we can better support our customers on their sustainability journeys.

It’s often the case that clients are really keen to be more sustainable, they just aren’t sure where to start. Being able to have those types of conversations has led to some great opportunities.

We also offer a Clean Growth Financing Initiative (CGFI) which means development clients can benefit from zero arrangement fees depending on the SAP score and energy rating of the property they're building. A number of our clients have already benefited from zero-fee lending through the scheme so far in 2021 and they’re using the funds to develop greener housing and flats – which are in high demand – and contributing to putting high-quality building stock into the market, which will be there for future generations.

Our investment clients can benefit from exclusive access to our Green Buildings Tool, a digital insight tool that enables clients to identify, evaluate and understand the estimated outcomes of potential investments to make their property more sustainable and energy efficient. This information can be incredibly valuable for clients; not only does it help them navigate upcoming regulatory changes, we’ve also seen a number of instances where being greener has helped them attract better quality tenants and higher yields.

Moving forward we’re exploring how we can develop products for our investment customer base along similar lines to the CGFI and working on a number of other initiatives to help support our clients in being more sustainable and play our role in helping the UK move towards a low carbon economy.

Looking to the future

There's definitely an appetite to increase their portfolio size among clients on both the development and investment sides. How far that goes will depend on a number of factors, including the vaccine rollout.

However, while to a certain extent the future is out of our control, clients with a sound business model and a future-focused outlook realise that what happens in the short and medium term ultimately won’t necessarily affect their longer-term goals.

As a UK-focused lender, our priority is to support the country through this recovery period and help the economy to move forward. It’s our view that really good development land with sound planning will continue to be in high demand, along with sustainable investment opportunities. We’re seeing the demand and the desire for both increasing month-on-month at the moment and both have great potential for contributing towards boosting the UK economy.