Market offers major opportunities

Antony: Welcome to MPA TV. I'm Antony Field, editor of Mortgage Professional Australia. My guest today is Jean-Pierre Gortan, managing director of commercial finance, brokerage, simplicity, loans and advisory. JP was named MPA's top commercial broker for 2023. Hi JP and thanks for joining us.

Jean-Pierre: Good morning, Antony. Thanks for having me.

Antony: The economy is under increasing pressure from rising interest rates and inflation. How would a recession affect businesses credit ratings, as well as lenders and brokers ability to secure finance for their clients?

Jean-Pierre: Thanks. Thanks, Antony. A great question. Um, so the the likelihood of a recession. Look, I am I don't have a crystal ball. The all the economic factors, the sort of strong rising of interest rates or the kind of I think it's 11 or 12 rate rises that we've had in succession from the government are weighing down on business. But business borrowers as they are with all the kind of the residential and kind of moms and dad borrowers. And so there is a there is a kind of an implied slowdown of the economy as a result of that. And so what I would what I'd expect to see is, is demand dropping significantly. Now whether the whether the RBA has gone a little bit too far and he's will push the demand so low that that we will dip into a recession has yet to be seen. What I do expect is that that they have no real choice in what they're doing, given the amount of inflation or given the level of inflation. At the moment, we are seeing obviously signs that that is now coming back. So there will be there will be some pressure on on borrowers as far as being able to access credit. So I'd suggest that lenders, banks in particular, will have started making adjustments to their kind of hurdles and their the the the amounts that are required to be shown as far as profitability to be able to service a certain amount of debt. And so it is going to be a very it's going to be a multifaceted contractionary environment for borrowers. So I think that they're going to be they're going to need to turn to to to sort of commercial brokers as far as being able to access credit to just to stay in business, to to kind of continue to to grow and things like that. So yeah, it is going to be very interesting times.

Antony: Thanks, JP. What are the emerging alternative finance trends such as non-bank and peer to peer lending? And how are these trends changing? Commercial finance broking?

Jean-Pierre: Probably around the time of the Royal Commission, we started seeing a real strong emergence around the kind of 14, 15, 16. So about 8 to 10 years ago we started seeing a strong emergence in the non-bank sector, um, sort of taking up the space left by the major banks, especially in sort of commercial construction and even kind of low doc lending. It was it was pretty prevalent in the early 2000s here in Australia that even banks would do kind of low doc lending and they moved away from that. Um, now that that could have potentially been a risk averse, it could have been because they were risk averse or it could have been an APRA kind of regulation that came in to, to kind of move them away from that. So the last kind of 8 to 10 years has seen a strong emergence of those kind of players in the in the construction space and in particular the low doc sort of term lending space non-banks such as your latrobe's, those type of people in the world, they make up a large portion of of deal flow for for borrowers. So it is it is expected that it's going to continue. I don't ever think that the majors are going to move back into that space. So quite happy for for for these non-banks and and these non-banks in particular to take that kind of riskier end of the spectrum. But ironically enough, it is the spectrum that we're talking about. The banks were very happy to play in exactly that and probably a little bit more aggressive stuff early in in the kind of 2000 like when I was back in my NAB days, some of the things that I see like this kind of 65% loan to value ratios and things like that, they we would at NAB, we'd do 70 or 75. No, no issue at all if we had a mitigant for why. So it is an interesting space, but it will continue to develop peer to peer in particular. A lot of these non-banks, you wouldn't you wouldn't actually know it, but they fund that way anyway. So they'll, they'll, they'll write a loan, it'll then get passed across to their Treasury Department, then it'll get slotted up into smaller increments and then investors come in and buy those. And that's actually the funding model for many of those those types of structures, whereas you'll have your kind of traditional kind of the peppers, the think tanks that fund under traditional kind of securitization model. But but there's a mixture of all of that out there. And and I believe it's going to continue to get stronger.

Antony: Thanks for that, JP. What are the opportunities for residential mortgage brokers to diversify into commercial finance?

Jean-Pierre: Yeah. Thanks. Thanks. This. This one's. This one's probably a topic that's pretty close to my heart, um, given. Given our various business streams. But there is a strong there's a, there's a, there's a, there's a gap, especially when you compare the volumes that are being written in the residential space. I think it's about 70% of all flow written by residential mortgages, by by mortgage brokers. It's as at best guesses. The, the MFAA estimates that it's somewhere between 15 and 20% of commercial flow is written by brokers. So there's a there's a very big opportunity for for brokers in general, not just residential brokers, but guys that do kind of mixed mixed sort of portfolios to to move into this space. I think it's I think it's it's very important to note that it is very different to residential. So whatever moves into this space for diversification needs to come with some some some care and some training and and like it has to be well thought through because unfortunately, inexperienced brokers that try and solve a problem for a commercial client can can put them in the wrong wrong lender, can put them in the wrong product, can might have a very shallow pool of of opportunity options that they've got that they could discuss with them. So they don't know. They can't be truly certain that they're meeting the client's needs and and actually getting them the best outcome.

Antony: Thanks, JP. How important is professional development and networking for commercial brokers?

Jean-Pierre: Yeah, it will. It's actually really important. So, so networking as far as because the industry is so look, I couldn't even tell you how many residential lenders, let's say there's kind of the top tier, let's say it's kind of eight to 10 to 12. And then if you go a little bit further, it might be 20 or 25 total lenders in the residential space or maybe a little bit more in commercial. There are hundreds like you really need to be in and amongst it and dealing with commercial on a day to day basis to really know what's out there and who is who is good at a certain type of asset, who is good at a certain type of structure, have those relationships and being able to have kind of strong and robust conversations with clients and being able to kind of articulate the scenario to whoever it is that you're pitching the loan to, to, to brokers with, with, with different experience levels, could speak to the same lender and get very different outcomes just by the way that the scenario is premised and the discussions that they had. And so it is very important that they're kind of very well entrenched in the industry and kind of a networked and professionally developed as far as kind of being in there every day.

Antony: Thanks for that, JP. How can new technologies such as AI and digital platforms transform commercial broking?

Jean-Pierre: This is a topic that's probably it's pretty hot topic at the moment. There's a number of players out there in the in the space trying to almost create the kind of the apply online of of commercial to kind of help facilitate commercial kind of transactions like almost like a workflow tool. The issue with this and the reason that it hasn't been done successfully either here or overseas is that there's so many variables in a in a commercial scenario and a lot of the work is done pre it's done pre the kind of lodgement of the transaction which almost the courting of the lender and finding out which is the best scenario which, which which lender will give us the best structure pricing etcetera. So it is, it is one of those things that needs to continue to be like it needs further development, further investment in that space. Um, but it will, it will definitely facilitate I think as a result of tech and all that, there'll be a little bit of a consolidation of, of players. The commercial market tends to be fragmented, a lot of kind of single operators with support staff and things like that. I think there will be once technology and in particular maybe even AI comes in and can can assist with some of these loan scenarios, then I think that there will be a yeah, like a bit of a consolidation of industry and that and the compression of the time to get from a scenario from a client to the correct answer. I think it's that's, that's the, that's the nirvana of of kind of this. I don't I'm not I'm not kind of in the camp of where a deal will come through and it's kind of straight through processed into a bank I think that's probably a little bit away because of the the variables. It might it might be okay if if it has characteristics like a residential loan where you've got kind of a loan that you can kind of just type into a system. Even I think even apply online at the moment, has a kind of a straight through type thing. But but it is there's so many variables I think that will only cover a very small portion of the market for the time being.

Antony: Thanks for joining us on another episode of MPATV.

Jean-Pierre: Thanks, Antony. Thank you very much for having me. I'll look forward to catching up again.