While we encourage brokers to assemble syndicates of private investors, and family offices with limited investment experience to diversify into commercial mortgage investments, not all securities are suitable for these non-professional lenders.
The following are examples of securities that require substantial expertise and standby resources in order to be successfully liquidated (without a shortfall) in the event of a default:
- Construction loans,
- Development sites (unless their value disregards the DA uplift),
- Subdivisions,
- Specialised securities whose value depends on a going concern or anchor tenant (e.g. nightclubs, marinas, day-care centres, nursing homes, private hospitals, motels, hotels, service stations, shopping centres),
- Farms,
- Loans where a non-trivial portion of the security consists of book debts, stock, plant and equipment, boats, etc.
Such loans are best left to lenders who have the in-house resources and expertise to step in and take over quickly in the event of default. We do not believe this requirement can be avoided simply by lowering the LVR.
The optimal securities for non-professional lenders, and for syndicates of such lenders, are those that can be sold with a four-week auction marketing campaign. This includes straightforward commercial buildings (warehouses, offices) that can be sold with or without their tenant, as well as houses and residential apartments. These assets behave like a commodity attracting multiple buyers, easily priced, and offer a quick sale process even in distressed scenarios. They can also be realised by solicitors rather than receivers.
We will decline to act on loans where we consider the security is too specialised for the lender’s circumstances.
