Why are loan requirements for commercial property so onerous?

I have an industrial property bonded to a Nedbank term loan of initially 10 years and R1 million. I have paid 116 instalments so far, with four payments left and about R60 000 outstanding. I also gave a deposit of R350 000 when I bought the building for R1.35 million. 

The same tenant has been there for all these years and the rent has escalated to the current R270 000 p/a and gets paid into the same bank’s account.

When the lockdown started I told my banker that I want to restart the 10-year term again for the registered bond amount of R1 million, which is now only about a third of the property’s value. Sticking with the current bond amount reduces the costs and hassle of registering a new bond. The reason is that I can assist my tenant with a rental holiday if needed and I will have some cash available in case an opportunity presents itself. Thirdly, I am used to paying the instalment even before the current interest rate cuts. 

I am dumbfounded by the response: I must supply all current financials for myself and the company and besides signing personal surety I must also pay an application fee of 1% of the loan amount (R10 000) and a valuation of the property for R4 000. I am also told that this process will take a long time because the bank is very busy processing relief packages and the valuer will only be able to visit the property after lockdown. 

I have more of these properties under similar circumstances. 

I grew up believing that gearing property is a very good way to acquire wealth and I still believe that, but under these onerous requirements it’s hardly worth it for a 10-year bond. 

Where can I find other solutions, financiers or products to gear my commercial property?

Firstly, your bank’s reaction in these unprecedented times is certainly not surprising. The pandemic and lockdown have created an enormous amount of economic and financial uncertainty, and your bank is obviously taking all necessary steps to mitigate risks. During periods of uncertainty, risk-takers are bound to be extra-cautious otherwise we would run the risk of repeating the global financial crisis of 2008/9.

Given that a decade has passed since the bank had sight of your financial position, requesting your financial statements seems to be a reasonable and standard request, bearing in mind that this is a business loan and not a residential bond. Commercial property is considered by banks to be higher risk than residential property.

Further, requesting a physical check and valuation of the property is standard practice. There is a much lower turnover of commercial property than residential property and, as a result, there is a much smaller database of information available to banks when valuing the property. It is understandable that the bank would want to perform a physical valuation.

Depending on your age, it is important to bear in mind that the bank is not necessarily able to ‘restart’ the loan. They will naturally need to reassess the risk and the value of the property, especially looking forward to a post-Covid-19 economy. The fee of 1% to 1.5% seems the standard when applying for such a loan.

It is important to bear in mind that your personal circumstances may have changed considerably over the course of 10 years. Further, as a result of Covid-19, the bank will be concerned as to how your financial situation will be impacted going forward. As such, they are taking all the necessary steps to perform a thorough risk assessment.

There is no doubt that there will be many financial casualties as a result of this lockdown, which in turn will lead to many rental defaults and vacancies, and a suppressed property market for some time still. This essentially means that lending institutions would need to revalue your property in light of the new risks that have presented themselves. Should the bank grant you the loan which you, in turn, are unable to pay because your tenant has gone out of business, they would be saddled with your property. The bank could then be forced to sell the property at a discount in order to recover some of their losses.

Gearing property works well provided that property prices are rising at a greater rate than the cost of borrowing, as you essentially get growth on someone else’s money.

When the converse happens, however, you can potentially lose money you don’t even have.

The following is an over-simplified example:

You pay a R100 000 deposit on a R1 million property and finance the remaining R900 000. Market values drop by 20% due to Covid-19 and you are forced to sell because your tenant can’t pay the rent and, as a result, you cannot service the bond. The property is sold on for R800 000 (ignoring any other costs). You started with R100 000 (being your deposit), which you have lost. In addition, you owe R100 000 to the lender. That, very simplistically, is the danger of gearing. This is the risk the lender needs to factor in as part of the risk assessment process.

Lastly, alternative lenders are most likely to charge higher interest rates than banks in order to cover their risks.

The bottom line is that a commercial property can be risky and cumbersome for the lending institution to offload with no guarantee of a buyer, and your bank seems to be taking reasonable steps to protect itself.

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