What is in store for commercial lending in 2024?
The year is only a month in; however, Stamford Capital has already seen a record number of settlements cross our desks for January. The demand for finance – and the service of a broker – has never been higher as clients navigate prevailing market challenges. While the challenges of the past few years are spilling into 2024, there are some pockets of opportunity. We expect the following to come into fruition:
1. Residential and Industrial assets will remain strong:
While lenders are still acting conservatively, they are viewing residential and industrial assets safer to fund. The housing shortage will make residential a favourable asset for the next few years.
2. Rate stability will encourage confidence to return:
With all Big 4 Banks predicting we’re at the cash rate peak, borrower and lender confidence is returning. This will open up access to capital with appetite for higher leverage.
3. Non-bank lenders will continue to carve out market share:
Banks will still be acting conservatively, constrained by their loan covenants, leaving room for non-bank lenders to offer more flexibility and less conditionality. For the near future, Interest Ratio Coverages (ICRs) will continue to impact what banks can lend against CRE investment assets.
Interestingly, banks are increasingly continuing to offer “out of the box” products for loans around $2-3 million with as much as 100% of the purchase price covered. This smaller end of
the scale is more resilient to fluctuations and downswings, and typically much more liquid. Banks are more comfortable lending into this space with minimal loan covenants.
These Lease Doc Loans are typically supported solely by rental yield. But in a high interest rate environment with low yields, meeting ICR covenants can be difficult without additional income to service the loan. Typically, to reach 60% and above debt cover through bank lenders, investors will need to demonstrate serviceability.
Last year remained fairly liquid, and we are anticipating this year to remain the same. Lenders are still keen to see quality transactions cross their desks, which is good news for investors and developers. The market is pricing for rate relief at the end of the year, which will add even more opportunities for activity.
Ensure you’re working with a finance broker who has deep relationships with the complete lender market to help you navigate 2024. Your Commercial Collective team can assist you with getting in touch with our finance partners at Stamford Capital.