THE BUDGET
NOT SO BORING FOR
THE HOUSING MARKET
SMALL BUSINESSES
UNDERSTANDING THEIR
CONFIDENCE, CONDITIONS
AND CHALLENGES
MPAMAGAZINE.COM.AU
ISSUE 15.7
GLOBAL MORTGAGE INNOVATION
THREATS AND OPPORTUNITIES
BEYOND OUR BORDERS
BROKERS ON
BANKS
It’s time for the industry’s
most important results to
see the light of day
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COMMERCIAL
UNDERSTANDING BUSINESSES
TALKING
BUSINESS
Small and medium
enterprises are the lifeblood
of a commercial broker’s
business, so it’s vital you
understand the challenges
they’re facing in 2015
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OUR BUSINESS EXPERTS
AS A BROKER, you already wear plenty of
hats – product guide, negotiator and gateway
to a host of other services. So we can see why
adding ‘business expert’ to the mix might not
seem worth the effort. But if you’re looking
into commercial broking, or even just dealing
with self-employed clients, it’s vital you have
an understanding of the challenges Australian
businesses are facing – and how you, the
broker, can be an indispensable asset.
Brendan Wright,
CEO, FAST
Glenn Mitchell,
head of commercial
and leasing,
Vow Financial
Cory Bannister,
vice president and
head of distribution,
La Trobe Financial
Cosi DeAngelis,
general manager of
commercial origination,
ANZ
Mark Woolnough,
head of broker
distribution,
ING Direct
Peter Vala,
head of sales and
distribution,
Thinktank
Confidence, or lack thereof
You’d have to have been living in a cave the
past few months not to understand the
first reality of Australian businesses:
They’re lacking confidence. That,
not the state of the housing
market, is what has caused
a succession of RBA rate
cuts and a surprisingly toneddown budget. Business confidence
slumped throughout late 2014, according to NAB’s Business Confidence
Index, stabilising in April at +3 index points.
Small and medium enterprises have slightly
lower confidence, at +2 for the March quarter.
Both measures were at their lowest level
since mid-2013.
Why does confidence matter? As NAB’s
April business survey notes, “until confidence
lifts significantly, it is difficult to see a sus-
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COMMERCIAL
UNDERSTANDING BUSINESSES
BUDGET 2015
One of the headlines of the
federal budget was a $5.5
billion jobs and small
businesses package,
including a 1.5% reduction in the tax
rate for small businesses with turnover
under $2m and an immediate
deduction on every asset worth under
$20,000. Simon Mesne, partner at
accounting firm KMPG, reckoned the tax
changes would have a “meaningful
impact on entrepreneurs and small
businesses” – thus creating more
opportunities for commercial brokers.
tained economic recovery developing – to
date, rate cuts have not appeared to do much”.
More specifically, however, the confidence of
the businesses you cater to should dictate
your approach to marketing and the products
you’re offering.
Alongside confidence lies business
conditions, a measure that should correlate
with confidence but in reality can fluctuate.
Business conditions include labour costs,
purchase costs and product price growth,
amongst others, and they fell in April after
Commercial property
One area highlighted by several
lenders was SMEs that are pur­
chasing their own premises. For specialist
commercial lender Thinktank, commercial
“While confidence and conditions have
been mostly flat, business lending and asset
finance for SMEs, written through brokers,
has grown from 8% to circa 20% over the
past four years”
rising considerably in March, according to
NAB’s April survey. However, in trend terms,
conditions are still improving, as they have
been since the beginning of the year.
You need to understand the context of flat
confidence and business conditions, but it
shouldn’t put you off, says Cosi DeAngelis,
head of commercial origination at ANZ bank.
“Evidenced by the growth we have experienced
in our commercial broker business, it’s clear
that Australian businesses, whether seeking to
start or in growth mode, are increasingly using
brokers to source their funding.”
FAST CEO Brendan Wright points to the
numbers. “While confidence and conditions
have been mostly flat, business lending and
asset finance for SMEs, written through
brokers, has grown from 8% to circa 20%
over the past four years.”
“From a broker perspective, it’s about
having those conversations with your clients,”
adds Wright, “particularly at a time where it’s
advantageous for them to think about
investing in commercial assets – get them
thinking about where they want to be from a
business growth perspective and how you
44
may be able to help them get there.”
In order to help you start those con­
versations, MPA asked a variety of com­
mercial lenders what they’re funding, and the
areas of growth and contraction brokers
should look out for.
property purchases made up the majority of
destinations for their funding, considerably
outstripping refinancing, according to
Thinktank’s head of sales and distribution,
Peter Vala. Both Thinktank and ING Direct
reported that commercial property purchases
have been highly important over the last 12
months.
What’s really driving commercial property
purchases are SMSFs, Vala notes. “There has
been a definite increase in demand for
financing the purchase of a commercial
property under an SMSF structure, which is
consistent with the taxation benefits to small
business owners and investors.”
Whilst the Financial System Inquiry
questioned the suitability of allowing SMSF
investment in residential property, its role in
commercial property acquisition is well
established.
Cory Bannister, La Trobe’s vice president of
sales and distribution, believes SMSFs require
a very particular marketing approach from
brokers. “[SMSF] is something we are actively
promoting to brokers, encouraging them to
review their database for self-employed clients
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COMMERCIAL
UNDERSTANDING BUSINESSES
to see if they are interested in purchasing
commercial property via their SMSF,” he says.
“Feedback from our brokers has been encour­
aging as to the level of untapped potential
sitting in their CRM systems.”
In the long term, both domestic and
foreign investors may continue driving com­
mercial property investment. La Trobe
observed a return of investors to small and
medium commercial property (under $3m),
suggesting those buyers are “looking to take
advantage of the higher yields commercial
property is generating in comparison to
residential assets, which are performing at or
just slightly above cash at present”.
Construction
Connected with commercial
prop­erty investment is the con­
struction industry. Construction was a major
driver for commercial brokers in 2014; in
fact, five of our Top 10 Commercial Brokers
last year were construction specialists.
However, NAB’s recent SME survey described
construction as an ‘under performer’. Con­
struction at the top end is also suffering –
NAB’s May ASX 300 report (of Australia’s
300 biggest listed companies) noted that
“sentiment is particularly weak around very
big construction firms”.
Of course, when you’re talking about
construction, you do need to draw a very
clear distinction between commercial build­
ing projects (offices, hotels, etc) and resi­
dential construction, which, being tied to the
housing market, thus remains strong. The
Housing Industry Association’s National
Outlook, which was released in May, claimed
SME BUSINESS STRATEGIES
Firms remain focussed on less disruptive (and sometimes costly and/or risky) strategies to improve competitiveness
70%
60%
March quarter 2014
March quarter 2015
50%
40%
30%
20%
10%
0%
Website
New product
Online
marketing
Reduced
pricing
Offline
marketing
R&D
Outsource
New location
None
Moved
location
Other
Strategies empoyed over the past 12 months to improve competitiveness
Source: NAB Quarterly SME Survey, March Quarter 2015
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COMMERCIAL
UNDERSTANDING BUSINESSES
MOST SIGNIFICANT
CONSTRAINING
FACTORS FOR SMES
The constraining factors that worsened
most in 2014 were
Cash flow
Demand
Staffing
house building was at record levels, although
it admitted that growth was more narrowly
concentrated than last year.
HIA chief economist Dr Harley Dale com­
mented that “super low interest rates are doing
their job, but there is a lack of complimentary
policy reform … the detached house
construction cycle has peaked well below its
potential because households can’t pay the cost
of waiting up to 14 months for titled land, or
multiple months for a simple building approval,
or borrow the additional amount required to
cover government-imposed gold-plating of
user pays infrastructure”.
Manufacturing
According to Thinktank’s Vala,
“there is no doubt parts of the
manufacturing sector are benefitting from
rising home-building activity”. Indeed, NAB’s
SME survey saw conditions in manufacturing
‘notably’ improving, albeit only to the neutral
mark. That said, manufacturing firms were
amongst the most confident SMEs. FAST
also nominated manufacturing as an area to
look at for the coming few months.
Not everyone is so confident about manu­
facturing: La Trobe Financial listed it as one
of several sectors – including retail and
transport – struggling because of ‘inadequate
capital capacity’ as a restraint on profitability.
They suggested brokers working with these
sectors “may wish to focus on ways of
releasing capital or consolidating business
debts with a view to reducing cash flow drag
on the business until conditions improve.”
Long-term challenges
The sectors above represent a
small proportion of businesses out
there; we picked them for their particular
traits and relevance. Whilst it’s impossible
to understand the situation of all industries,
many businesses – SMEs in particular – do
face similar challenges over the long term.
Bankwest’s recent Business Leadership
Report contains a vast number of insights
into the priorities and fears of small and
medium-sized business leaders, which any
trusted adviser should know. For example,
48
“Irrespective of the
level of confidence
within the consumer
or business
environment, a broker
should be positioned
as a member of
a client’s circle of
trusted advisors”
productivity leadership – increasing profit
through improving process and structural
efficiencies – is the most popular managerial
strategy, selected by one in five businesses.
Another indication of strategies being
utilised by businesses comes from NAB’s
SME report, which looked at strategies
adopted in March quarter 2014 and March
quarter 2015 in order to increase
competitiveness. The relevant statistics here
are much more obvious – just over 10% of
businesses had a ‘new location’, whilst around
6% ‘moved location’ – and both statistics
were up from 2014, encouragingly.
The NAB SME report also looked at the
long-term constraints facing SMEs, and
found that cash flow, demand and staffing
were the biggest constraints in 2014. These
reduced in 2015, now that government policy
and tax are perceived as more restrictive, as
well as interest rates and credit “showing
signs of becoming more restrictive”.
Commercial brokers are, of course, expertly
placed to respond to the latter two concerns.
Finally, ANZ’s De Angelis points to
Australian businesses expanding abroad as
an area of opportunity. “Research has
revealed that 25% of Australian businesses
operating internationally require additional
debt funding every year, whilst 62% of those
businesses said they found it difficult to
source this funding from Australian financial
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COMMERCIAL
UNDERSTANDING BUSINESSES
SPECIALIST
COMMERCIAL
BROKERS FROM
OUR TOP 10
These are just a few of the best – read
about the rest of them in MPA 14.10, in
print and online.
Diana Liu
Wealth Connected Pty
Large commercial property
developers
Daniel Green
Green Finance Group
Hotels, pubs and nurseries
Jayden Vecchio
Discovery Finance Group
Residential property,
construction
Think you’re a Top 10 commercial broker?
Ask your aggregator to nominate you for
MPA’s Top 10 Commercial Brokers 2015, in
MPA 15.09, on desks late August.
50
institutions,” he says. “Australia has nego­
tiated a number of significant free trade
agreements with key trade partners, and
there is huge potential for the country to
broaden the mix of its export base.”
Knowing the cycle
It’s important to know your current
and potential business clients inside
out – their industry, challenges, constraints
and management philosophy. Some of that
knowledge can come in useful when picking
broker should constantly be considering
where they can bring value to the table for
their customer through the various cycles.”
FAST CEO Wright holds a similar view:
“We’ve had brokers have great success in all
sorts of industries, such as manufacturing,
retail, healthcare, agriculture – the list goes
on. I would advise brokers that, rather than
picking a specialty based on which is easiest,
they go with what feels most comfortable for
them – both in terms of the customers they
tend to speak to every day, and the industries
“Brokers dealing with SMEs in these
weaker sectors may wish to focus on ways of
releasing capital or consolidating business
debts with a view to reducing cash flow drag”
clients who suit your specialty, and many of
our Top 10 Commercial Brokers are extremely
selective; Adam Slade-Jacobson of Monark
Property Finance, who came in second, wrote
$93 million in 2013-14 over just three loans.
Lenders also can help provide you and
your client with specific business intelligence.
ANZ point to their ‘A-Z reviews’ of com­
mercial clients, which they provide to brokeroriginated clients whilst utilising the exper­
tise of business bankers. La Trobe Financial
have senior credit analysts, and Thinktank
and FAST have specialist BDMs, often with a
credit background.
However, it’s not about picking a ‘winning’
industry; the commercial broker is there for
the long term, Thinktank’s Vala argues. “Irre­
spective of the level of confidence within the
consumer or business environment, a broker
should be positioned as a member of a client’s
circle of trusted advisers,” he says. “The
broker is there to help facilitate any financial
changes the client is seeking within their
business, from either raising debt for
expansion purposes or assisting with the
restructure of debt to better terms and
conditions. Rather than focusing on specific
industry segments, looking for opportunity, a
that are most significant in the economy of
their local area.”
For ING’s Woolnough, the broker plays a
valuable role as a mediator between banks
and SMEs. “Brokers can serve as a conduit in
observing and experiencing the challenges
that SMEs face and communicating these to
the banks and wider industry for an oppor­
tunity to address these challenges. “Similarly, over time, banks are required
to change processes and request more of
SMEs during the banking relationship,” he
continues. “Whilst we try to accommodate
this as much as possible by streamlining
processes, a broker is vital to the customer
exper­ience, as they will work to simplify the
overall finance process by acting as the
dedicated intermediary, put more time back
in the customer’s day, and allow the customer
to focus on other issues and opportunities at
hand in their business. “ And whilst knowledge is vital, it’s the
broker’s core skills that make the difference,
Woolnough concludes: “The key here is that
regardless of which industry the customer is in,
the commercial broker will navigate through
their challenges and make what some people
see as a rather daunting process simple.”
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