Commercial Property Finance 2025: LVRs and Deal Structuring

This is a Momentum Media production. Nerd alert! Property nerds. The home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. Welcome to another episode of the Property Nerds podcast.

I'm your co-host Arjun Paliwal, and we've got something different cooking in today's show. I've asked the gurus and the experts to come in and join me on the commercial space. And so we've got our head of commercial, Chris here. Chris, how are you, mate? I'm good, thank you, my man.

How are you? Yeah, good, good. And we've got Jack from Fouracre Financial, who is a commercial gun as well. Him and his team have been doing some great things working with our team on commercial finance. So can't wait to jump into today's episode, because this has been a hot demand, highly requested episode to talk about commercial finance, because resi, I think there's enough transactions that go on in Australia, close to what, 600,000 a year almost, where people feel like that's kind of well understood.

Even though you were surprised that, you know, Jack, there's a lot of conversations. He goes, ah, it's not as well understood as you think, Arj. There's a lot still to teach people, which we do on the Property Nerds. But today we're going to go into commercial financing and just talk about the world of commercial finance and property deals in 2025, how to finance them, things to consider. So Jack, I might come back over to you, mate.

Firstly, let's talk about just the financial landscape, meaning like, how's the lending environment changing right now in the commercial? What are you kind of seeing things come up so far? Yeah, so I'd say that a lot of lenders are coming into the space, like a lot of the third tier lenders and even some well-known names in the lending space are coming into commercial. Not a lot of them drop out once they go in. They're also increasing their loan amounts and LVRs to try and attract more business.

And yeah, longer loan terms than we've seen previously. So yeah. I think the main thing to read from that is like banks are taking it seriously now, because when you're at a high interest rate cycle and you see the chances of that coming down, banks are trying to get on the front foot to capitalize on that because they've already seen the first movement down. And as interest rates are where they are now, and as they keep coming down, the net returns just get smoother. But also you de-risk the dealing of the bank from a risk perspective, because they're like, hey, assets are so self-servicing as the next few years rates come down, that all of a sudden we don't see the default risk being as high and they're able to cover that a lot more.

So obviously there's industries and which industries are good and not good. But talk to me in the LVRs part, Jack, just in terms of what you're seeing out there, because usually we've seen commercial be this huge cash hungry machine that you need to input 30 to 50% deposits on some specialized assets. What are you seeing out there now across the world of LVRs? Yeah, well, it's no secret that one lender that was doing 100% LVRs, it wasn't that simple though. You had to be a business owner and 30% of the 100% LVR was done on a much shorter loan term.

So serviceability was quite difficult. But plenty of lenders are doing 80% LVR for commercial and even more so in the SMSF space. We'll touch on that a bit later. Yeah, but it's quite common. You'll see 80%, 75, 70% LVRs with commercial.

Awesome. So now what we mean is we're talking on a two mil purchase price. Chris, have I got my numbers right? Sort of 20% on a two mil, 400K. That's right.

Costs for purchasing maybe another 150K. So you're up 550s, that minimum cash input. And if you're getting there from cash, that helps. If you're getting there from equity, that helps too. But just be mindful that on the equity front, it does mean you're 105% lended and that means that the cash flow is not going to be as good.

So you have to just make sure that that's the vehicle for you or not. And that comes through strategy. But mate, coming to you, Chris, from your side, obviously you're seeing different movements in the finance world. And as a result of that, what are you seeing versus banks versus non-banks, right? You're seeing a lot of different type of lenders come up.

Are you seeing anything from your work with Jack that's like, hey, interesting to see these new players into the mix? Yeah. So I think Bank of Queensland, Judo Bank are coming into play at the moment, which we never saw in the past. 70% LVR for lease stock loans. I've never seen that before.

And they're sharp interest rates. I was surprised when I saw some of the deals you guys were looking at, like, you know, with sixes in front of them, lease stock. Crazy. Yeah. BOQ made a really big shift.

They're not really focusing too much on the broker channel for the resi side, but they made a really big shift to commercial. This is where, you know, the whole bank versus broker thing comes back again, where you've got to know your options, know that constantly evolving world. Now, in terms of banks, like we now know what's shifting on 2025 as a landscape. So it's like LVRs are shifting, more are opening up, lease stocks are coming into the mix. Talk about what matters now, Chris, in terms of, you know, just the net lease income, the tenant quality, the importance of that in this environment when you're seeing finance shifts the way they are.

Yeah. So what I'm seeing at the moment is the higher the net yield, obviously, the more funding you can get, especially with lease stock loans, but also tenant covenant, like the strength of the lease, like the Mercedes-Benz deal that we presented before. Strength, tenant strength plays a big part and the history of where that tenant has occupied the premises as well. So if they've leased it for the last 20 years, they're likely going to lease it for the next 10 years, right? So that adds to the finance play as well.

Now, I know in terms of that finance play, we've seen where we've all collaborated and packaging of deals is something that's quite important, right? Could you talk about what that means when someone's like wondering a packaging of a deal, Chris? Because I think when you think of resi, it's like, yeah, here's my contract to sell over to you. Don't ask me for stuff. I gave you docs before.

I don't want to talk about it, Jack. But in commercial, it's different and it can be the game changer in getting assets forward, right? Getting deals to be made on time, even with such strong assets. What is deal packaging? What's the importance of it?

How does it work? Yeah. So when we package a deal up in commercial, we get all the property details, you know, the asset type, the location, the net return. We package up things like the lease as well. And we do a cash flow model for the banker as well, just so they can see what things look like.

They can take the numbers out of that cash flow and they can put it into their own models and package it up for the bank. So it's in one nice little, you know, you've got the details of the property, the broker will add the details of the client, and then they have all the information like the lease, the contract of sale, everything like that. I can't tell you how valuable that is for us. Like that email, it's as simple as sending it to a bank and saying, hey, check this out. And from there, they're back to us within an hour.

Like they look at that, all the details are there. And you can see the difference when you get a client that does something as stupid as buying a commercial property without a buyer's agent. And then comes to you and goes, oh, I've got this property, mate, here's the link. And they're just kind of, you've got to take their word for it, but you've got to draft up the email. It's a lot less detailed than what you get from Chris.

But yeah, it's really helpful to shop the different lenders for the type of property we're looking at. Yeah, absolutely, guys. And funnily enough, people don't recognize that 14 to 21 days, whilst it might seem like a long period, it goes fast, right? It's about how long they take to do a valuation these days. Yeah, and that's the thing, right?

So this is something new to resi investors. Resi investors, what you need to realize is that your valuations can be done at a system. The algorithms are built in that way. The desktop level, which simply means that an assessor was looking at it at a manual view, but just on internet examples of comparable sales, or a short form. Short form, they go out to the property, they look at it.

But again, inspections can be arranged in 48 hours, fast turnarounds, and 24-hour reports back. So all of a sudden, you're talking 48 to 72 hours, and you've got reports back. Commercial, whole new world. They're investigating the lease. They're doing what they call a long form valuation.

And some turnaround times can be quick at five business days, but quick is not five business days, right? Because if you think about it, plus a weekend, it's seven. That's a whole week gone It makes sense that it's specialized lending, but like, I mean, I've got kids. I remember trying to get them into a childcare and it's like, there's not enough of them around. So I don't think- The demand's wild.

Mate, honestly, like, I don't know, especially for something like that. It's not like you would see the industry change in a significant way where that wouldn't be a viable asset long-term. Like I could understand from office spaces or something like that, but it seems like they're more friendly to office spaces with everything that we've seen in the last few years with work from home. But a childcare center, a 50% LVR, you're kidding. 100%.

And I think that's a big thing that needs to change. And the reason why is that like, you got to look at Australia now as a whole economy. I know we're going a little bit to this like childcare specialization conversation, but I think I've got to, you know, have you seen that Family Guy episode, this grinds my gears and he just like goes, yeah, I feel like this grinds my gears, right? And what this is, is that you have a declining birth rate. So you've gone from a 2.

6 down to a 1. 5 birth rate. You're now- We can change that, mate. Me and you. Come on.

I'm two in. I'm two in too, mate. I'm above the averages now. I'm above average. And so I think from that perspective, what I find is like, you know, migration's a big topic, right?

And migration needs to happen in Australia massively for certain labor skilled and everything to come in. Because if it doesn't, relying on a 1. 5 birth rate, you're looking at Japan 2. 0. You know what I mean?

And we have that, what do you call it? The silver tsunami of the next 10, 20 years to come up. I think the main thing you've got to look at is that childcares, if you're going to start from the funding cycle and you improve that, you improve the construction availability for that, you improve the red tape around that, more of them pop up, supply will increase, costs will reduce too, because you can't keep charging the same if you're not getting the same amount of kids and you want to be able to increase the demand in your center. And then as costs improve, parents and their affordability of having a kid is another big reason as to why they don't have kids. You know what I mean?

People now, back in the days, had one person on an income. Now it's like, you have kids and two people aren't working? That's a luxury. What I think now we have at home, where I'm the sole income earner, is like this, no pun intended, Taj Mahal type luxury thing happening. It's like royal family of India.

My dad's days, that was like every household was one worker, one looking after. But now it's like this huge luxury that you've worked your butt off to reach. And so it's crazy because I think if childcare as a funding, I know we're talking commercial finance, but this has everything to do with that. If we can fund more, if there's more availability of it, whether it's construction of new or whether it's established changing hands and staying active, it's going to help a lot. But I mean, that's just a side note, I guess, just on that.

And it's important as a specialist lending because now, Chris, if we're talking, just love to do some math here. Someone looks at that at a commercial deal at five mil and goes, oh, that's a five mil industrial. Jack can get them away with a 1. 25 mil cash input, right? That's right.

But then suddenly, if we're talking at a 65% LVR, now you're talking 40% deposits because 5% for costs and 30 for that, two mil cash input. So your math has gone from going, I need 1. 25 to two mil, which look, many people have in the childcare industry when they're buying those assets. But if you're unaware of specialized lending, you just completely change the game. You need an extra 750.

And I don't know how thick people's mattresses are for the extra 750 can, but that's a big part. So that's specialized lending as one part. I guess the next thing I want to talk about on the lending parts is just this world of alternate lending, right? We know there's lending for commercial to buy a commercial property, say in a trust or personally, but there are now more and more vehicles open up where people buy commercial property in, one thing being SMSFs. Could we talk about the rise of commercial lending you're seeing, Jack, in SMSFs and why people consider it as part of their strategy to begin with?

Yeah. So again, more and more lenders jumping into SMSF because they see it as a massive market to be lending in. So it's very common to see 80% LVR on a commercial property in SMSF, but you're also seeing 30-year loan terms across the board, which you can probably see that once or twice, maybe three times outside of SMSF, but in SMSF, I mean, I struggle to find a lender who doesn't do 30 years at 80% and it seems like there's more lender options that are playing in that SMSF space than in the commercial space outside of that. So I don't know what's going on, but like even a residential property in SMSF is still considered a commercial deal, but I don't know why they would treat a commercial property in SMSF so much more favorably than outside of that. It's interesting, right?

Because they're doing it even though there's less options of them available. You'd think in a world with less lenders, it's less favorable, but they're making it more favorable. I don't know. I feel like there's a lot of lenders, man. A lot of lenders.

Coming up in SMSF now. In SMSF, because I do SMSF only now. Like we've got a team of brokers, we've got commercial only. I do SMSF only. So I know how many lenders there are.

There's only a few that we deal with, mostly that have the offset accounts, but all the third tier lenders that are popping up wanting to get into that space is, I don't know, I might be missing something, but yeah. No, it's big. It's big. I think they're seeing the rise of it because we actually did a study on it on the SMSF space and it was a research that we conducted with the survey research to understand what's happening and a combination of low trust in like the government or, you know, funds looking after your future. Secondly, a combination of like wanting more control, like people just wanting to control their own funds more.

And then third is the final piece of the boom that has occurred in property over the last five years has given people a confidence of, I want exposure to that. Right. But on that note, in terms of people thinking of the SMSF, firstly, get financial advice to make sure it's the right vehicle for you. But secondly, if you're looking at commercial, yes, whilst the LVRs are good, we also want a certain price range to hit. We often find a fund in SMSF with 550K or more in cash position combined with say a husband and wife as an example, would be a sufficient balance because in the 400s is usable for the actual purchase of a commercial.

Then you've got some buffer in there for offsets, rainy day, potential diversification. So you want to be in that 550, 600 plus when it comes to an SMSF balance together to purchase a solid commercial. Chris, I want to come to you to the last one here. And where I want to come to you with is more so for like people's lending considerations. You've seen, you know, collaboration with Jack and collaboration, understanding the financing, and you've seen people, obviously the packaging deal is a big one.

Different structures was another one. So Chris, this has obviously been a good segment covering into finance and just looking at it from, you know, LVRs, commercial finance, differences, specialized assets. But I want to come to you for anything non-finance you see as an impact to deals going through smoothly or not in commercial and what buyers should be ready for, whether it be the greater team or whether it be, you know, to do with finance. What are some final thoughts you have there? Yeah, I think it's mainly around communication is the big one between, especially getting the buyer to introduce the broker to, you know, your buyer's agent.

There's a bit of fluidity there where the broker and the buyer's agent can work on the deal together. Or if the buyer is a sophisticated investor and they don't have a buyer's agent, just making sure that they're communicating with their broker, getting what they need to the broker, broker sends in the list, checklist. Also just around timeframes, around valuations, getting clear on that, because it normally takes, like we said, you know, 21 business days, 10 business days to get a valuation done. Just making sure that we have that in place in the right settlement timeframes. Yeah, I think that settlement timeframe is a big one.

You know, people are so used to Jack on their resi side. Digital loan docs all day, but like commercial, especially when it's in a trust, a bit different. Legal advice. Legal advice. You know, it takes a bit of time.

So you're talking what, like, you know, typical resi we've seen 25 up to 42 days. I've done a five day settlement. That was quick. They weren't doing you any favors. But I think, yeah, commercial, if you had your act together, you can get it done pretty quick.