The banking Royal Commission’s final report, released on 4 February 2019, included only minor changes to small business lending, making it relatively good news for the majority of Northern Beaches businesses.
The report included no changes to SME loan guarantors—third-parties who commit to paying back the loan if the lendee cannot—or business loan renewal policies, despite these being investigated by the Royal Commission in May 2018.
More significantly, the report did NOT recommend that consumer credit laws be extended to cover businesses, a result that was attributed to the necessity of reasonably affordable and accessible credit for small businesses, alongside concerns that further regulation would tighten lending.
Given that small businesses have reported experiencing a credit crunch since the Royal Commission began in December 2017, this is hopefully good news that, at the very least, the current climate won’t worsen.
Asset finance lender Dan Toms of Cashflow It Group suggested that this was because most of the effect had already been felt by SMEs during the investigation process.
“Throughout the Commission, traditional lenders—banks—adopted a very conservative approach to lending, especially for small businesses generally. It’s been harder for SMEs to get access to funding through banks and approval times are significantly longer,” he said.
“Even once all the suggested recommendations are implemented, I don’t think there are going to be any additional adverse effects to SMEs. Everything’s almost already been allowed for or adjusted in anticipation of the report—we’ve borne the brunt of it already.”
However, he added that there were likely to be broader impacts from the report on residential property values and changes to servicing assessments which could affect SMEs, although he didn’t believe the current credit squeeze would last forever.
“Eventually, I think that banks will come back, but it won’t be in the immediate future as there’s still a raft of measures that they need to implement. I’d give it two to three years before we see a shift in the banks’ appetite.”
So what changes were suggested?
One aspect of small business lending that the final report did recommend changing was the definition of a small business in the 2019 Banking Code.
Currently, a small business includes enterprises with up to 20 full-time employees and a turnover up to $2 million. If the recommendations are adopted, this would increase to include businesses with up to 100 full-time employees and turnovers of up to $5 million.
“There’s certain taxation benefits and allowances that are applied to SMEs, so it normally bodes well if you can fall into that category,” explained Toms.
Despite this, he still anticipated a move away from banks towards alternative lenders due to continued uncertainty over the fallout and implementation of the report’s recommendations, alongside already extended bank loan approval times.
“SMEs can still access funds through other channels, particularly as alternative lenders have different criteria and matrixes to traditional lenders,” he said.
“And as more alternative lenders come into the market, that creates more competition and better opportunities for the consumer that’s looking to borrow funds.”
Given that 98.8 per cent of alternative finance inquiries came from SMEs in 2017, combined with a 69 per cent increase in commercial demand for alternative finance, it appears that many small businesses are already looking elsewhere for funds.
This may also be influenced by changes to self-managed super fund (SMSF) property loans in 2018.
Traditionally, some commercial investors or business owners may have looked to banks for a SMSF loan, however all major banks stopped offering SMSF property loans by late September 2018.
This was attributed to increased self-regulation by banks to avoid further trouble and scrutiny while the Royal Commission was being conducted.
While smaller banks and alternative lenders may still offer SMSF loans, options are more limited for those considering investing in this way.
The bottom line
So what’s the bottom line for commercial property in the Northern Beaches? Pine Property founder and commercial real estate agent Patrick Kelleher believes that the local commercial market will remain relatively unaffected.
“Sales of commercial real estate on the Northern Beaches have remained relatively steady throughout the Commission and we don’t anticipate it being adversely impacted as much as the residential property market,” he said.
“The market here [on the Northern Beaches] is fairly buoyant because land is scarce, limiting the emergence of new stock, and options to buy are limited, with a high level of commercial properties owner occupied.”
“In addition, the majority of businesses and trades operate and reside locally, ensuring a consistent level of underlying demand.”
While he acknowledged that investing in commercial real estate had become more challenging as lending tightened throughout the Commission, he noted that investors and small businesses were seeking out other avenues for borrowing.
“There are other financial institutions that you can utilise to obtain the necessary funding, so the report will not necessarily have a big impact if you’re willing to broaden your horizons and look to more competitive options.”
He added that commercial lending had always been less risky than residential due to equity requirements being around 30–40 per cent as opposed to residential’s 10 per cent.
However, he noted that some financial institutions were seeking greater levels of equity which, coupled with the adjustment of the lending criteria, had made it more challenging to secure funding for some.
So while it’s yet to be determined exactly if, how and when all the final report’s recommendations will be implemented, early signs suggest that it’s relatively good news for small businesses and commercial real estate on the Northern Beaches more broadly.