Maximise value from small commercial portfolios At all ends of the scale, it is essential that you make the right decisions for your commercial mortgage book, says Andrew Doyle, chief executive officer of Crown Mortgage Management.
The availability of refinancing options for commercial mortgages has improved over the last year. This is likely to be a great relief to many, considering the potential size of the market in the future.
CoStar News reports that there is “an estimated €60.5 billion of floating rate European CMBS (commercial mortgage-backed securities) debt still outstanding” as of the end of last year. Approximately €22.8 billion of this is scheduled to mature in 2013; a colossal amount. Lower but still significant sums will mature in the following years. Those who choose to become involved in refinancing these loans will face making decisions that will quickly determine how much value they can expect to get from them.
The outsourcing of larger commercial mortgage loans is an established practice, with specialists such as CBRE and Hatfield Phillips continuing to provide services for those working at the upper end of the business. What may be overlooked though is the benefit of reviewing how the management of smaller commercial mortgage loans can also be adapted to suit current market conditions.
Portfolio transactions
This is particularly important now, as developments in the market hint at improving prospects for investors who wish to engage with commercial mortgage loans. The ongoing divestment by Lloyds Banking Group of its non-core assets is a case in question (for example, the sale of the Project Thames portfolio to Cerberus for £325 million).
The big question these transactions raise is why do buyers believe they can extract greater value from the portfolio than its current owners? A significant part of the answer lies in their approach to managing the loans.
If a servicer is able to define their relationship with the commercial borrower from the outset, they can make certain that the borrower realises its goal is to ensure the best financial outcome from the loan, unclouded by any thoughts of future banking interactions. The servicer can then concentrate on dealing with each loan on its merits, determining the best course of action to take on an individual basis.
Crown’s commercial director Julien Holmes explains how third party servicers do this: “With commercial assets there is not a strict process to follow, as there are many options available to the lender. After review, these alternatives will often be discussed as a group before a strategy to maximise return is agreed. Extensive experience in the commercial real estate market is vital to servicers when assessing loans.”
For such an approach to work, clearly it is vitally important to have knowledgeable staff, but more importantly they should have the right attitude and an ability to negotiate successfully with property entrepreneurs. They have to be prepared to employ a hands-on approach in order to establish a useful dialogue with the borrower from the start.
Risk-based review
Once this is in place, best practice is to conduct a full risk-based review at least annually. There should be a RICS qualified surveyor available to help with valuation queries, particularly for properties last reviewed prior to the financial crash.
This allows for the gathering of information that will help guide the management of the loan, such as the financial acuity of the borrower, whose background could be anything from an experienced corporate entity to a novice entrant into the commercial mortgage field.
Potential issues can also be identified before they occur, such as imminent covenant infractions or proposals based on planning applications, that from experience are not always disclosed.
A servicer can consider all possible tools for loan management, such as term extension, collecting a capital repayment surplus from rental income, requesting additional contributions and assessing asset management strategies in conjunction with the borrowers. Usually, such options will only be employed if the servicer is certain that in doing so they will achieve the optimal results possible.
Best returns
There is a benefit for brokers when portfolio holders choose to manage their mortgages as individual financial assets. The improved chances of successfully refinancing loans and the provision of creative solutions can prove valuable to them in winning and retaining customers.
In the end, the decision on what to do with your commercial mortgages should be led by which solutions are liable to offer the best total returns.
My opinion is that the approach you should take depends on whether you are working with a long-term core customer or whether the business is viewed purely as a financial transaction. If it is the latter, why not emulate the techniques of the outsourcers and drive greater returns for yourself, or alternatively outsource directly to a specialist?