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The impact of rising interest rates on commercial funding availability

I recently joined Mortgage Professional Magazine (MPA) for a podcast on the impact of rising interest rates on commercial funding availability and what it means for business owners and investors in key sectors. Click on the link below to have a listen or recap on the key points below:

2-Minute Summary – Commercial Property Funding Snapshot 2023

• Reduced transactions: this is in line with reduced business sales volumes/limited stock in the commercial sector as potential sellers hold out.

• Refinancing activity is up: businesses and investors across most industries are feeling the squeeze of increased funding costs, a softening in property values and ‘harder-to-meet’ bank metrics or difficulties in accessing equity. As a result, more clients are looking to non-bank funders or private lenders for funding solutions.

• Lender appetites: The rising cost of wholesale funds coupled with reduced earnings has put pressure on Interest Coverage Ratios (used by the lender to measure how well you can cover the interest due on debt) and overall borrowing capacity. On the plus side some banks are reducing their coverage ratios, allowing them to continue lending at traditional Loan to Value Ratios (LVRs).

• Retail: Lower LVRs and higher coverage ratios have been in play for some time. Choice or access to funding options is dependent on asset class – high turnover retailer will have more options than an inner-city cafe. Reduced consumer spending is impacting retailer income and potentially, future ability to cover increased rental costs. This is a key consideration for commercial landlords.

• Commercial Construction & Development: Major banks are generally placing more scrutiny on projects. Procurement of funding is more challenging with fewer lenders willing to play in the space. There is a definite disconnect between cost to develop versus funding costs. Market correction is expected. Clients are predominantly operating on a ‘build and hold’ model.

• Office Space: WFH still the preferred environment. Demand still on the low side. Investors need to carefully consider tenancy requirements and subsequent infrastructure offering to secure high-quality, longer-term tenancy.

• Industrial Assets: Lender appetites are still strong. Supply is still limited in line with demand. South-East Qld rents are comparatively cost-effective although tenants will need to factor in rental increases as investors look to recoup costs.

• The good news: some banks are actively open to reviewing of policy or minimising key metrics to assist commercial and business borrowers in the rate-rising environment. You just need to know which bank and who to ask.

The key to securing better funding in the current market is knowledge. You need to know which banks, lenders or private funders really want your business. Make sure you are working with an experienced finance broker who has access to a trusted panel of bank and non-bank lenders and who has a proven track record in the industry or business you are working in.

For an overview of competitive funding options available to your business today or if you simply need some direction, please feel free to contact me.

Published: August 2023

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