As residential lending slows, the greatest opportunities for brokers will emanate from the SME market, according to Semper Capital’s director.
Speaking on The Adviser’s In Focus podcast, Andrew Way, director at Semper Capital, said that the residential lending market in Australia will likely continue on its downward slide due to “stalling” property prices, subdued risk appetites of lenders and rising wholesale funding costs.
“[Against] the backdrop of the royal commission, there’s been latent demand. You’ve got banks having to increase their capital adequacy from 9 per cent to 10.5 per cent over the next three years. With a market that is coming down in value, that creates stark pressure [on] the Treasury department,” Mr Way said.
“Everybody therefore slips down the risk curve. You have those that were providing third-tier loans now [offering] near-prime [loans] and bridging lenders that are assisting with longer-term facilities, such as ourselves, for one to five years.”
While many brokers are focused on the residential mortgage market, the Semper Capital director suggested that they turn their attention to the small- to medium-sized enterprise (SME) market, where opportunities are growing.
“If I was a broker, I’d be looking towards SME funding, because that’s where the greatest need is going to be,” Mr Way said.
“SMEs used to go directly to their bank. Now they’re confused. They’re being turned away — particularly owner-occupiers of commercial properties — because it doesn’t suit the risk-weighted averages of the banks.
“So, [SMEs] are definitely going to be seeking brokers.”
The director noted the importance of understanding the range of non-bank options available for SMEs. Numerous reports, including those of the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) and the Reserve Bank of Australia, have cite the statistic that small businesses — around one in five in Australia — are still struggling to access finance to support trading activities and growth, despite conditions improving since the global financial crisis.
“If I was a broker today, I would be seeking to learn [about] non-bank opportunities. I’d be looking to the second and third-tier markets and to the short-term market,” Mr Way said.
He noted that SMEs tend to approach brokers “at the last minute” after having “tried everything else”, meaning that they are usually in urgent need of access to capital.
“They are classic optimistic-type borrowers. They think that they’re going to be able to solve the problem themselves. So, by the time they come to you they need a very, very quick solution,” the Semper Capital director said.
“They may need to take short-term funding first while you arrange the longer-term solution for them. So, know your client’s need.”
Mr Way additionally noted that brokers may need to educate their SME clients about the changing requirements for loans.
“We used to see a large amount of loans where the brokers were seeking to help the borrower to quarantine risk against a single asset. In the new reality, they may have to educate those clients that there may be a need for multiple asset securities and that the time for quarantining risk against a particular asset [has] passed for now,” the director said.
The director also commented that the last thing small businesses often need is more debt, regardless of the cost of the debt. Rather, they need reduced tax obligations and other forms of government support.
“Finance companies are commercial. Until there is a government-funded, taxpayer-funded fund… then I can’t see there being non-commercial credit product in the market,” Mr Way said.
The ASBFEO had made the recommendation earlier this year to establish a Business Growth Fund that provides long-term finance solutions to SMEs. Specifically, the office of the ASBFEO suggested that through such a fund, SMEs would be able to apply for loans between $250,000 and $5 million, with terms up to seven years, secured against the business.
Its office also proposed the launch of a government guarantee scheme as well as the establishment of a fund to reduce the cost of capital by purchasing hybrid capital instruments issued by smaller lenders.