It's been a tough few months for many buyer agents.
While residential investor appetite has fallen post-budget, climbing interest rates had already knocked confidence out of the market well before that. The buyer's agents in my circle have felt the impact, and a lot of them are wondering where to turn. For some, the commercial property market looks like a possible answer, and that’s the conversation I’m seeing happen now.
It makes sense that some are looking that way. With negative gearing and the CGT discount scrapped, the capital-growth play that drove a lot of residential investment doesn't add up the way it did, and commercial offers things residential rarely did: yield, net income, tenants who cover the outgoings, leases measured in years. But a residential investor moving into commercial isn't just changing asset class. It's a different market, with different risks and a different way of being assessed, and some might be doing it for the first time. Where it gets unfamiliar fastest is the finance, and that's where I see them come unstuck first. When a client of yours moves on a commercial investment property loan, it works nothing like the residential lending your clients are used to.
So if you're thinking about this too, here are three things I'd want you to know from my experience as a commercial finance broker before you take a client into their first commercial purchase.
The loan is sized on the asset, not the person
This is the biggest adjustment coming from residential. Your client is used to their borrowing capacity being a function of their income. In commercial, the lender assesses the asset first, the lease, the tenant covenant, the remaining term, the rent review structure, the debt service coverage, and the borrower's personal income becomes secondary. Two investors with identical incomes can be offered very different funding on the same building, and a client who has set their budget on a residential-style assumption can find the real number is nothing like it. If you're advising a client on what they can afford, that assumption is the first thing worth testing, because everything downstream, the offer, the deposit, the structure, is built on it.
The deposit is a range, not a fixed percentage
In residential your client anchors on a loan-to-value ratio and treats it as fixed. Commercial doesn't work that way. A strong property with a quality tenant on a long lease can sit at the top of the range. A specialised building, a regional location, or a short or uncertain lease can pull it well below, which means the deposit your client needs is asset-specific and often larger than they planned. A late-discovered deposit gap is one of the most common reasons a first commercial purchase stalls after contracts are signed, and it's entirely avoidable if the likely range is established before the client is committed to a particular property.
I always tell clients to make the purchase subject to finance
This is the one I feel strongest about. I tell all my clients the same thing - make the contract subject to finance. That’s because commercial assessment is less predictable, and the consequences of an unconditional contract that can't be funded are best avoided. Protecting your client here is squarely in your interest too, because the deals that fall over are the ones nobody wants their name attached to. A finance condition isn't a sign of a weak buyer. It's what a properly advised commercial investor does whenever possible.
The thread through all three is that commercial finance rewards getting the numbers right early, before the emotional commitment to a specific property sets in. That's genuinely different from the residential rhythm, and it's the part I wouldn't want a client of yours discovering the hard way.
If you're one of the agents adding commercial to what you offer, I'm happy to be a finance sounding board as you do it. I can give any client you're working with an indicative read on how a particular purchase would actually be assessed against the commercial property finance market before they commit, so their first move goes the way it should. More often than not, the agents whose clients have the smoothest experience are the ones who brought the finance question in early.
Nadine Connell is co-founder and director of Smart Business Plan a specialist commercial finance brokerage, and author of The Premise Effect. Since 2009, she has helped more than 3,300 Australian business owners and investors arrange in excess of $550 million in commercial funding
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