Commercial Lending: Banks Put Tenants Under The Microscope

Over the last 12 months, banks have been continuing to ramp up scrutiny on commercial property assets. There has been more attention paid to interest cover for investment assets however anticipated interest rate cuts and the recent reduction of bank bill swap bid rate (BBSY) will likely lead to some relief. 

An emerging trend that has largely flown under the radar is the additional consideration lenders now apply to both the underlying asset class and tenancy profile of individual assets. Borrowers must show their tenancy strategy is sustainable because lenders are increasingly wary of perceived risky asset classes and ultimately want to know who will be paying the interest bill. 

Asset classes that are favoured in market, experience directly benefit in debt markets. Broadly speaking, this has recently applied to both the industrial and commercial office asset classes. For example, we are seeing bank margins for prime commercial assets well below 200 basis points, a reduction of roughly 20 per cent since the start of 2019. 

Conversely, specialised asset classes are at the whim of changing lender appetite and the class suffering the most right now is retail property. 

Some retail properties are experiencing significant challenges resulting from online disruptors and changing consumer behaviour, with reduced non-discretionary spend directly impacting on tenant cashflow. These factors subsequently impact borrowing capacity on retail assets with heightened bank scrutiny on tenants. 

Any asset holder with a high proportion of tenants with businesses that depend on discretionary spend will find it difficult to obtain finance. Bricks and mortar retail remains an ongoing challenge - especially when tenants have visible trading issues. 

But for those managing assets with sustainable, long-term income from quality tenant agreements, values should hold or firm. This is because these assets can attract debt, and debt appears to be getting cheaper thanks to the reductions in BBSY and lender margins. 

Remember that now more than ever before tenants are under the microscope along with all the financials of the asset, so it’s in your best interest to make sure your tenant is looking up to scratch when it comes to securing finance. It really has never been more important to keep up appearances.