Brokers are expected to account for half of all commercial loans written over the coming years, as an increasing number of new entrants venture beyond residential mortgages.
The Australian lending landscape has changed dramatically over the past 12 months. Cast your mind back to 2014, when the initial utterings from the Reserve Bank about an “imbalance” in the mortgage market sparked the first round of speculation about how regulators might achieve the stability they wanted.
Since then, residential lending has been hit by out-of-cycle rate hikes, differential pricing, huge volumes of investors reclassifying their loans and capital requirements forcing further pricing and policy changes. It’s not over either. There’s more to come as the Basel Committee churns out an endless stream of supervisory measures that APRA has traditionally adhered to.
All of this activity has taken its toll on buyer sentiment and the residential market has started to cool. At the same time, ASIC is preparing its findings from an investigation into broker remuneration on residential mortgages. Commercial lending, however, has been spared.
If you’re looking for a bit more balance and stability in your broking business, commercial lending might just be the ticket.
A growing number of new-to-industry brokers are finding a key point of difference in areas of lending most brokers have typically ignored.
Vow Financial’s head of commercial and leasing Glenn Mitchell has recently seen a surge in the number of new-to-industry brokers leaving the banks to focus on commercial lending.
Mr Mitchell spent five years at PLAN Australia, setting up the aggregator’s commercial lending operations before joining Vow in 2014. With the new breed of brokers hungry for non-residential deals, he expects the third-party channel to account for half of all commercial lending business in the coming years.
“A few years ago, you would have been looking at 10 to 15 per cent of brokers taking the commercial and asset finance space,” Mr Mitchell told The Adviser.
“Today, it would be in excess of 30 per cent without any problems at all. Most of the majors are predicting that it will be like residential, with brokers writing 50 per cent of commercial deals. It’s being driven by the new players coming in.”
The new brokers entering the industry have a variety of backgrounds. Two things they have in common, however, are a good education and an eagerness to use their existing skills – or to acquire new skills – to write sizable commercial deals.
“I think the new brokers are more educated. I can think of three that have joined us from a bank recently. They are very driven and can see where the opportunities are in the marketplace,” Mr Mitchell says.
While those who leave the banks to become brokers will lose their regular salaries, the opportunities they’re finding in the commercial lending space are paying off.
“If they look long term, they could retire a lot earlier if they can build a nice book,” Mr Mitchell says.
“You are talking about a much larger loan size in this market. The availability of funds is better. Every day I am getting inquiries from different lenders coming into the market who want a share of it.”
Think outside the square
Non-bank commercial lenders such as Thinktank have maintained a strong appetite for broker-originated loans. Unlike the majors, commercial lending is their bread and butter. They have a solid reputation for being responsive and nimble, with an ongoing focus on training and educating brokers.
Thinktank’s head of sales and distribution, Peter Vala, has noticed a marked increase in the number of brokers writing commercial loans for the first time.
“It would seem there are more brokers dealing with commercial loans of all sizes, which is partly driven by a greater selection of funders in the market that is enabling the diversification of a broker’s income sources,” Mr Vala says.
“The seeking out of additional revenue sources also coincides with an apparent tightening in credit policies in a number of traditional areas of lending,” he says.
“Separate to the diversification of revenue streams, most brokers are becoming aware of the need of have a full service offering as they become their customer’s relationship manager.”
Commercial lending is a broad term that includes several lending solutions. These range from the simple purchase of a commercial property such as a warehouse or retail shop for owner-occupier or investment to a full balance sheet and cash flow lend
Some lenders chase all of these deals. However, Thinktank keeps things simple.
“All we do is commercial property lending for purchases, refinance and cashout,” Mr Vala says. “Our offering is clear and simple, and an excellent starting base for a residential broker looking to enter into the commercial lending market.”
Property investors account for a decent share of broker clients. However, with the number of regulatory changes designed to curb investor lending growth over the past 12 months, some banks have lost their appetite for this segment of the market. Some have even stopped lending altogether. Where does this leave clients? The banks may have lost their appetite, but have borrowers?
“If your clients are finding it difficult to invest in residential property but are still seeking a property-secured investment return, then there will be more borrowers seeking commercial property loans,” Mr Vala says.
“Being the relationship manager for your customer, the broker will naturally try and find a lending solution for their clients. As a consequence, we will see more residential brokers looking at commercial loan applications not only to replace a lost residential revenue stream, but to also enhance and retain their offering to their clients.”
From banker to broker
The path from commercial banker to commercial broker is nothing new. However, as Mr Mitchell points out, the number of new entrants is on the rise.
Last year, Vow signed a new broker who had more than 23 years’ experience in the commercial lending space.
Travis Fulton, director of Melbourne-based boutique financial services group Guildfords Capital (Australia) became a Vow broker following a 20-year career with NAB. More recently, he led Macquarie’s professional bank business in Victoria.
Mr Fulton told The Adviser he decided to move into the third-party channel after identifying areas where he could add value to commercial borrowers.
“I had a 20-year career with NAB that ranged from being a teller in the early days to managing institutions such as Wesfarmers,” he says.
“So I have been fortunate to have had exposure spanning the breadth of the commercial sector. I have worked in institutional banking, corporate banking, business banking and was the business lead when NAB set up its commercial broking business in 2012.
“NAB invested a lot in me over the years which I’m grateful for and I certainly put my hand up to get as much exposure as possible."
Mr Fulton has now teamed up with Vow Financial as the aggregator looks to grow its commercial footprint.
“There is a real unfulfilled demand for commercial banking advice within the broker community. From what I have consistently heard over the years, there are not too many of us around,” he says.
Through a mutual friend, Mr Fulton met Mr Mitchell, who spent 12 years on the MFAA council and three years as the association’s Victorian president.
"We had lunch and I got to understand that Vow Financial has commercial growth plans within the sector that reflects my experiences and that our visions for growth are aligned,” Mr Fulton says.
“We both want to grow our respective businesses and I think we can really help each other,” he says.
After moving to the Victorian capital in 2006, Mr Fulton built a strong network of business clients and industry friendships.
He believes Guildfords’ diversified solutions across corporate advisory and governance, advisory, licensing, valuation and funds management, offer a productive environment to develop a commercial banking and credit services advice business.
“When a client walks in the door for corporate advice or needs an Australian Financial Services Licence for example, either they or someone they know will need banking and credit services advice,” Mr Fulton says.
“We are predominantly focused on commercial, which forms the foundation of our relationship with Vow.
“It’s what I enjoy, what I thrive on. It gives me energy.”
A growing sector
The commercial lending story is part of a larger, longer tale about the shifting Australian economy.
The resources industry is no longer driving economic growth as it once was and the next phase of growth needs to come from somewhere else. The federal government’s innovation drive, along with former RBA governor Glenn Stevens’ call for “animal spirits”, speak to the real engine room of the Australian economy – small to medium size enterprises (SMEs).
“There has been a renewed focus on growth within the Australian economy and how we adapt to a changing global marketplace,” FAST CEO Brendan Wright says.
“A substantial part of this growth will come by stimulating and supporting the two million businesses that make up the SME sector,” Mr Wright says.
FAST has been one of a handful of aggregators whose mantra has been to support this sector and, more importantly, to work with brokers to align their businesses to provide lending solutions to time-poor business owners.
“This opportunity has been embraced by over 60 per cent of our brokers who in the first quarter of 2016 settled a phenomenal 45 per cent of the $3 billion in new commercial lending originated by brokers,” Mr Wright says.
FAST brokers are writing more than half a billion dollars a month in business lending solutions for their clients. The aggregator’s team of partnership managers work with brokers on setting their business strategy to diversify into commercial and business lending and asset finance.
“It helps to identify the one in three clients that are typically business owners and then grow your business client base from there,” suggests Mr Wright.
He adds that one of his brokers, Kel Smith, recently reflected on how FAST brokers are perceived, “A bank sees FAST brokers as top shelf when it comes to commercial finance.”
Clearly commercial lending is an area where brokers can outshine their competitors. In an industry as fierce as mortgage broking, this is worth thinking about.
More than half of FAST brokers are now writing commercial business, and Mr Wright says one key driver of the recent surge in asset finance has been the tax allowance for assets under $20,000 for small businesses.
“FAST has also been responsive and recently launched a white-label asset finance pilot so brokers can have even more meaningful conversations with business owners,” he says.
“Brokers often comment to me the real sense of satisfaction they feel being part of the growth of their business clients.”
Helping clients prosper
If you are considering commercial lending, it’s worth taking the time to find out how many of your home loan clients are also small business owners. You might be surprised.
Suncorp recently revealed that one in every three home loans it writes are for self-employed borrowers.
Suncorp Bank national manager of small business and commercial banking intermediaries, Robynne Frost, says brokers keen to diversify into business lending should invest the time to learn about the SME sector and become comfortable with having discussions about SME lending solutions with their clients.
“Approximately 30 per cent of our home loans are for self-employed borrowers, which highlights the opportunity for our broker partners to cross-sell,” Ms Frost says.
“The important part for brokers is to have the confidence to have exploratory conversations with customers beyond their personal borrowing needs.”
Suncorp Bank recently developed a series of educational forums and workshops to support its broker partners to better understand how to leverage their existing customer base to attract new business and gain SME exposure.
One of the main challenges these customers face is access to capital and having the ability to draw funds in a fast and efficient manner so that they can grow and operate their business. This has been a problem for decades in Australia.
When non-bank lender Prospa started trading four years ago, the group looked at how it could take a small business owner’s information and data, present them with an approval and an offer in a quick and easy manner, and get them access to the funds that they need. It sounds simple. But just how can a new player help SMEs prosper?
“What we realised is the way to do that was in an online manner and in a data-driven manner,” Prospa CEO Beau Bertoli says.
“We set out to build a whole different way of looking at credit to the way that the Australian banks and other financial institutions looked at credit and we started to create quite unique ways of credit assessing business owners’ credit information,” Mr Bertoli says.
“That allowed us to look at many cases up to 400 data points to make our decisions and to do that at the click of a button as opposed to filling out 20 pages on an application form from the business owners’ side.”
Prospa has lent more than $100 million to thousands of business in Australia. The lender has more than 1,000 broker partners ranging from aggregation giants like AFG to one-man bands servicing their local communities.
“We will support all sizes of finance brokerages and we do have a national footprint as well. We have representatives in every state and territory around the country,” Mr Bertoli says.
“That allows us to provide that insight, coaching and training because this is a different product, a lot of finance brokers have never sold this type of product or offered this to their customers.”
James Mitchell has over eight years’ experience as a financial reporter and is the editor of Wealth and Wellness at Momentum Media.
He has a sound pedigree to cover the business of mortgages and the converging financial services sector having reported for leading finance titles InvestorDaily, InvestorWeekly, Accountants Daily, ifa, Mortgage Business, Residential Property Manager, Real Estate Business, SMSF Adviser, Smart Property Investment, and The Adviser.
He has also been published in The Daily Telegraph and contributed online to FST Media and Mergermarket, part of the Financial Times Group.
James holds a BA (Hons) in English Literature and an MA in Journalism.
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