As we enter uncertain times, it’s important to understand commercial property finance and the effect any economic downturn may have on it.

As a general rule, (and there are always exceptions to every rule) finance for commercial property investments tend to incorporate higher rates and lower loan to value ratios (LTV’s) than residential buy to lets. Lenders will also tend to look for some experience – either in commercial property investing or at the very least in residential investments over a period of time. Commercial property is viewed as a ‘sophisticated’ strategy as commercial values can fall heavily in line with downturns in the market (as happened in 2008) so lenders tend to encourage prudent LTV’s, although 75% LTV is currently achievable on some types of assets.

Showing my age, and having now been through three recessions, I can safely say that the commercial finance market is the first to lock up during challenging economic times. Commercial lenders are notoriously risk averse and will always be the first to lower LTV’s and restrict lending well before residential lenders in most instances. During Covid, the commercial finance market behaved true to form and, in general, became more challenging - and it still remains much tighter than it was pre-pandemic.

Of course, the availability of finance can vary between sectors of the market.  Many lenders, post Covid, have been nervous about retail lending – even in some instances demanding that their valuers value tenanted properties as if they had vacant possession. Vacant properties are, of course, generally worth less than those that are tenanted under a lease as they are perceived as being riskier. This has contributed to down valuations and reduced lending in that sector.  

Commercial property values tend to be the quickest to react to economic conditions (either positive or negative). Residential homeowners tend to only see a revaluation of their home during a small number of specific events - upon purchase, sale and (occasionally) revaluation for a new mortgage. However, in the commercial space, bearing in mind that many investors are large corporates, commercial portfolios are regularly revalued – as often as quarterly for some pension funds and bi-annually for the large corporate REITS. This tends to mean that there is a quicker crystallisation of value, yields and open market rents in both upturns and downturns than in the residential space, where only sentiment can be relied upon in the early days of a downturn.