How to survive a recession: Commercial Mortgage Q&A

At Swoop we are lucky to have highly talented teams of individuals who are experts in their field. Edward Page, Head of Swoop for Brokers, has eight years experience as a property finance broker and has personally completed over 100 property deals.  

We wanted to ask him about how business owners should approach their property portfolio in the face of an oncoming recession.

With a recession on the way, should businesses be looking at buying property or keeping their heads down?

Edward Page:
Some of the best businesses were started in a recession – PC World, JD Sports, Sipsmiths to name just three. 

The truth is that headlines are one thing, how individuals respond is another. Some businesses either profit from a recession or are more resistant to recession challenges, such as healthcare, groceries and discount retailers. So it’s important to know where you stand. 

Looking at the history of recessions, there have been six since 1960 in the UK and three significant property market crashes. So the lesson to draw is that a recession doesn’t necessarily mean a crash in property prices.  In fact, property is claimed to be a hedge against high inflation, which the UK is currently suffering from.

Property is generally viewed as a ‘safe’ long term investment, particularly in the UK, therefore any downturn in values should be balanced off against the increases in values seen.

What about interest rates? Are these going to make buying property more difficult?

Edward Page:
Interest rate margins are remaining static but the base rate increase is increasing the cost of debt. The big problem with this is that it impacts cash flow.

If you have a mortgage, or are thinking of getting one, it helps to know the tactics that will mitigate the impact on cash flow, such as taking a longer term or opting for interest only repayments. These will of course increase the total costs over the lifetime of the debt, but could make a big difference if interest rates continue going up. 

I would recommend taking expert advice on your fixed rate to mitigate against the risk of another increase in base. The commercial market follows the domestic market and the last time I looked, a 10 year fixed rate for a main residence mortgage is cheaper than a five year fix. This is replicated by  commercial lenders showing banks anticipating this rate of rate hikes to slow or even go backwards. 

Things change fast, so get advice and act while it is still. valid! 

Could these increased borrowing costs lead to a reduction in property prices? The honest answer is yes, but we are a long way from that scenario. 

Are banks still willing to lend? Will this change over the next year?

Edward Page:
Yes, particularly the growing number of Challenger and Digital Banks which remain incredibly active and willing to support good quality SMEs.

Despite lockdown and increased rates, the 100+ lenders in the commercial mortgages space have continued to create new product offerings to compete for SMEs’ business. As this market continues to evolve there are constantly more options for SMEs.

Lenders are being more thorough in their assessment of businesses and debt servicing calculations. For example, they are stressing utility payments just now to assess the overall profitability of the business.

There is still significant cash in the system trying to find somewhere to go. Remember the business model of lenders is to lend – otherwise they won’t make any money!

The only thing likely to impact this is a significant correction in property prices causing lenders to cherry pick the lowest risk transactions. However, values remain robust at present.

How has the shift towards remote working affected the commercial property market?

Edward Page:
There was already a trend towards remote working and shared serviced offices. While the pandemic accelerated this, we could already see where things were going. 

We are seeing a big correction post-pandemic: people still want to collaborate and that’s generally easier in person than over a video call. Business premises need to be nicer places to be in when workers have a choice. We are definitely seeing an increase in refurbishment of communal areas and reconfiguring of spaces.

Such upgrades and refurbs are often combined with environmental upgrades that will help long term energy efficiencies.

If a business is planning to buy, how long will it take and what should they do in preparation?

Edward Page: 
As ever, thoroughly research the area, speak to local agents and keep close to them over several months. They’ll have their ears to the ground and provide a lot of knowledge. 

Think carefully about your deal term and make sure it’s the right choice for you in the long term. A good broker will have seen businesses similar to yours making similar decisions. 

Surround yourself with professionals that have worked on similar transactions and can point out the pitfalls. Part of the joy of working at Swoop is that this team is so experienced across so many sectors. Plugging into Swoop is an opportunity to get a breadth of expertise you’ll be hard pushed to find elsewhere. 

A good broker won’t just secure competitive terms; they will also be able to share their list of professional contacts and help you avoid some rogue ones!

Get everything in order. Accounts and management accounts are vital to lenders, having up to date trading information to hand really speeds up the process if applying for finance.

How will the coming recession be different from the 2008 crash?

Edward Page: 
I’m a bit wary of predictions about recessions. When they will happen, how long they will last and how deep they will go depends on more than top line economic factors. There are just too many unknown unknowns. 

The key difference between now and 2008 is how well capitalised the banks are (allegedly at least). One of the main problems in 2008 was that a proportion of the banks simply couldn’t lend, even if they wanted to. Hopefully this time banks will be able to continue lending, albeit with some adjustments to their criteria and appetite. Businesses won’t be cut off quite as harshly as they were in ‘08. 

Remember too that there has been greater scrutiny of bank credit policy since 2008 which means the quality of loans has been higher. Customers with existing mortgages should be in a more secure position and while challenger banks offer a great alternative in terms of flexibility and product range there are very few lenders (certainly none that we are working with) who are offering commercial mortgages to clients without thorough due diligence.

Combining this with an experienced professional broker and you are massively lowering your risk position on any new commercial mortgage facility you are taking for your business.

My belief is that alternative funding lines should play a role in reducing the length of the recession and allow good businesses to continue to thrive. 

To summarise: some sectors will do well. Others will be more vulnerable and take a hit – but they are more likely to be wounded than killed off. Commercial property will continue to be bought and sold because property is a long term investment and you can be confident that when recessions end, you’ll be in a better position than many of your fellow survivors.