Bridging & Commercial Supplement — 2024 SME Market Outlook

SME Market Outlook

IT’S CERTAINLY BEEN A CHALLENGING FEW YEARS FOR THE UK’S ESTABLISHED SMES

The Covid pandemic meant they had to fight for their very existence, which was followed up in 2022 with the sucker punch of rising energy and material costs caused by the war in Ukraine.

As if all that wasn’t enough, 2023 saw the Bank of England hike interest rates five times—up by 1.75 percentage points from the start of the year—to tackle the inflation brought about by those rising costs. If there was a silver lining to this, it was that the UK didn’t fall into the recession that was predicted at the tail end of 2022, or at least not yet.

Brokers have seen the knock-on effect for businesses at close quarters, helping their clients react to seemingly ever-changing market conditions. Who better, then, to gauge the mood out there at the start of a new year?

We asked more than 400 commercial mortgage brokers to tell us what they had been seeing in the market to assess the prospect of growth in 2024. Is there confidence out there, or not? For what reasons were businesses making applications? And where should brokers be focusing their efforts this year?

I found the answers to be incredibly revealing. I hope you do too.

Charissa Chang Head of broker sales—commercial mortgages (North and Midlands) at Allica Bank

2024 SME MARKET OUTLOOK REPORT

In our SME Market Outlook Report in Q1 2023, we were predicting tough times for the UK economy—unsurprisingly, this proved to be the case. However, as we shall see, businesses and brokers continued to find opportunities to invest and grow.

Once again, our focus was on the UK’s established SMEs (businesses employing between 10 and 250 people). This is a critical segment of the economy, accounting for 30% of UK jobs and turnover, and the driving force of innovation and growth in Britain.

In the last quarter of 2023, we asked more than 400 commercial mortgage brokers that support established SMEs to report on what they were seeing in the market to assess business confidence going into a new year. Here’s what we found.

2024: a busy year for brokers?

The standout finding from our survey is that 44% of brokers reported an increase in commercial mortgage applications in the last quarter of 2023, compared to six months prior. Staggeringly, almost a third (32%) witnessed growth of over 10%.

The source of this growth, according to half of the brokers we polled (49%), is a greater number of business owners looking to raise finance for investment. After the rollercoaster ride the economy has been on since the pandemic, is this a case of businesses being fed up with waiting for the perfect conditions to invest and getting on with their plans anyway? Although the Bank of England hasn’t ruled out further rate rises and inflation is still higher than its 2% target, the interest rate has stagnated for the past three Monetary Policy Committee meetings.

We also asked brokers about some more general trends they saw in the market in the second half of last year. With the successive interest rate rises in the first half of 2023, it’s no surprise that 38% said they witnessed a growing number of refinancing applications from those with fixed-rate deals reaching the end of their term.

While most of the borrowing was reported as being for business investment or bolstering resilience, we should also note that not everyone is feeling so bullish. In the face of tough market conditions, 22% of brokers stated that businesses were looking for finance to stay afloat.

Have you noticed a change in the volume of commercial mortgage applications you are getting now compared to Q2 2023?

More than 25% increase 10-25% increase

Up to 10% increase

No change

Up to 10% decrease

10-25% decrease

More than 25% decrease

Why do you think there has been an increase in commercial mortgage applications?

More businesses investing in property

More businesses looking to raise finance for investment

More businesses seeking finance to stay afloat

More businesses wanting to own their own premises

Other

Watch and wait?

Certainly, not all businesses are ready to take the plunge to invest. A third of brokers (33%) we polled saw no change in the volume of commercial mortgage applications, while 23% reported a decrease. When asked why, concern over further interest rate rises dominated (83%).

This is perhaps no surprise given the five Bank of England rate increases of 2023—quite a jump from when we asked the question six months ago, when 70% of brokers thought it was the reason applications had decreased. It could well be that a significant portion of businesses are watching to see how the economy pans out in 2024, waiting to see if cheaper rates materialise.

No longer going green?

One piece of policy that made the headlines in 2023 was the government’s decision to scrap the proposed new minimum energy efficiency requirements for rental properties.

Did some businesses breathe a sigh of relief at no longer being obligated to spend money for this? Our data would suggest so—40% of respondents said that landlords are no longer looking to improve their properties’ EPC ratings. Brokers also noted a drop in the number of clients looking for commercial mortgages to move to more energy-efficient premises to 28% in Q4.

That said, the number of brokers with clients looking for finance to improve the EPC ratings of their existing premises remained fairly consistent (growing slightly from 31% in Q2 to 33% in Q4).

Companies are also still investing in sustainability in other areas of their business. Demand for green finance to buy electric vehicles almost doubled from the second quarter to the fourth. Brokers also saw a slight rise in the number of businesses looking to borrow to make their products or services more eco-friendly.

Why do you think you have seen a decrease in commercial mortgage applications?

For what reasons have your clients sought finance when looking to become more sustainable?

Final thoughts

The forthcoming year will be dominated by elections across the globe and, with various ongoing geopolitical crises not looking like they will be ending any time soon, it would be foolish to attempt many predictions for 2024. Despite this, our broker survey has shown us there are still many reasons for brokers to be optimistic about the year ahead.

While it remains difficult, the economic environment is much more familiar for business owners than it was 12 months ago. Businesses have proved they can survive, and indeed thrive, despite the high costs of borrowing and operating margins being under pressure.

A perceived reduction in uncertainty may lead some business owners who have held off from investing to decide that now is the time to take that leap—the data Allica Bank collected suggests that this may already be happening.

What’s more, with interest rates fluctuating, it’s never been more important for a business owner to work with a broker to find the best option for them. Whether it’s refinancing existing lending or brand-new investment, brokers will be essential in helping to make borrowing more affordable.

The innovation and resourcefulness of the entire commercial finance community is going to be a vital component of the UK’s efforts to get back to growth in 2024. The green shoots of opportunity are there, and now it’s our job to make sure that business owners can grasp them.

The whole of the Allica Bank team looks forward to partnering with you in the year ahead as we help businesses to do just that!

WITH INTEREST RATES FLUCTUATING, IT’S NEVER BEEN

MORE IMPORTANT FOR A BUSINESS OWNER TO WORK WITH A BROKER TO FIND THE BEST OPTION FOR THEM

Stephen Spinks

Head of broker sales – commercial mortgages (South and Central) at Allica Bank

THE BROKER’S VIEW

WHAT ARE BROKERS WITNESSING IN THE SPECIALIST FINANCE MARKET?

David Grant, director at Axis Commercial Finance

“The drip effect of consecutive base rate rises during 2023 yet again proved that the most fragile commodity in the SME market is confidence. We’ve now had a couple of months without any further rate increases and hopefully, in the event the base rate has reached a plateau at 5.25%, confidence will return—it’s really just a case of the wider market getting used to this. Past experience shows us that there is usually about a six-month lag, so assuming we’re at a base rate plateau now, I expect it’ll be late Q2 2024 before we start to see the green shoots of confidence returning to SMEs, which will drive volumes back up. My forecast for commercial mortgage activity in 2024 is therefore a steady first half, and a busier second half.”

Chris Preston, head of commercial finance at Cornerstone Commercial Finance

“Notwithstanding the well-documented headwinds in the economy, demand for commercial mortgages has remained strong and we see this set to continue in 2024 fuelled both by clients’ attitude of ‘getting on with things’ and some good opportunities presenting themselves, but also by an even more cautious approach from the high-street lenders. 2024 will undoubtedly remain a challenging marketplace, but with skilled support and good structuring, clients will still be able to access the funding support they need— where possible this is commercial term mortgages, but increasingly we are having to use short-term bridging solutions.”

Natalie

Glover, associate at

SPF Private Clients

“I have already started to see a shift in clients seeking options now that rates are starting to hold or slowly decrease again. Previously, there was heavy demand for fixed rates to protect against any further steep hikes and get the maximum debt service coverage ratio stretch, but I am starting to see more clients looking for variable rates in hope that they will catch the wave back down. This alone shows more confidence in the way in which they expect the market to move over the coming months and year. Although none of us have a crystal ball, we too are positive that things should start to shift in the right direction during 2024. SMEs are a huge part of our economy, and we look forward to helping them with their growth plans.”

Harry Singh, managing director at Veer Capital

“As interest rates have been dropping for residential and BTL mortgages, I know a lot of my clients are hopeful this will filter down to commercial mortgage rates. Once this happens, they will start actively investing in the commercial property sector. Demand will hopefully increase when rates settle—until then, a lot of the investment deals do not stack up for an investor. Average commercial mortgage rates are around 8% and if you are getting a 9% or 10% yield on a property, it just doesn’t make financial sense. Owner-occupier purchases have been steady in 2023 and will continue into 2024.”

Charn Gandham, principal at Chancery Consultants

“As landlords look for ways to diversify and secure higher yielding properties, we find an increasing number of buyers looking into multi-unit, retail with residential uppers. Although interest rates are still high on commercial mortgages, there are still opportunities where owner-occupier businesses can cut their risk on the retail side by benefiting from a rental income from commercial property with residential on top, along with professional landlords looking for a longer-term tenant in the retail unit with the benefit of residential dwellings above. We find surveyors being the main disruptors in this space, seeing a 20-30% reduction on some valuations with a heavy view of caution. As rates decrease, we can also expect existing commercial borrowers with low LTV looking to move from high-street to challenger banks with a positive attitude to lend and quicker lead times to leverage and grow portfolios.”

HOUSE OF WORKTOPS CASE STUDY

Tron Worktops—which trades online as House of Worktops—secured a multi-million-pound commercial mortgage from Allica Bank to purchase a new headquarters in Enfield, North London, signalling the company’s plans for a major expansion.

The company’s new, larger £8.5m base— bought with the support of a £5.3m mortgage from Allica Bank—will support the next stage of Tron Worktops’ growth and allow it to meet increasing demand for its wood worktops and newly-launched wood flooring.

Tron Worktops is a family-run business, which produces and delivers bespoke worktops and flooring products directly to its UK customers, using premium timber from the Balkans.

“Allica Bank was the perfect lender to help us with this expansion. The firm met with us and took the time to understand these opportunities and the strength of our business. Allica Bank will be a fantastic partner to Tron Worktops as we continue to grow into the future.”

Mert Yashar, co-founder and director at House of Worktops

“Allica Bank is proud to support such a brilliant family-run business like Tron Worktops. The management’s resilience and creativity have seen them achieve astonishing results in a challenging economic environment, and it’s people and businesses like this that will be key in the UK’s recovery in the months and years ahead.

The firm has experienced significant growth since it started trading from its current St Albans base in 2019. The move to new premises, secured with Allica’s support, is part of an ambitious expansion drive, which will give the business significantly more warehouse and order fulfilment space for its worktops and flooring products. This will allow it to increase its newly launched wood flooring range and grow its builders’ merchants channel, which currently accounts for 40% of its revenue.

Mert Yashar, who owns and runs Tron Worktops with his brother Murat, was delighted to have secured the new Enfield premises with the help of Allica Bank, having been introduced to the firm by Damian Cain, director at Complete FS. He added that the extra capacity will allow the firm to take advantage of exciting opportunities for expansion, as it invests in new product areas and channels.

“This deal highlights Allica Bank’s expertise in supporting established businesses and our commitment to delivering regional support. We are proud to be working with Tron Worktops and we look forward to working closely with Mert, his brother Murat and their team to help achieve their next stage of growth.”

Michael Mann, BDM at Allica Bank

“Allica Bank, and Michael Mann especially, were extremely supportive during the progress of this deal. Loans of this size are often seen as a barrier to some lenders, but we were delighted with the speed and integrity given by the bank. Importantly, deadlines were met, and all involved were impressed with how the bank managed the process for this large loan.”

Damian

Cain

, director at Complete FS, the specialist distributor for this deal

ABOUT ALLICA BANK

launched in 2020

UK bank with offices in Manchester, Milton Keynes and London

The UK’s only full-service bank dedicated to serving established SMEs

We first reached profitability in 2022 and continued to be profitable through 2023

87%

of our broker partners rate us as ‘good’ or ‘excellent’

Allica Bank is a relationship bank, committed to empowering established businesses and their brokers to succeed. We combine modern tools and technology with real human expertise, tailored to you and your client.

2023 was an incredible year for the bank. Not only was Allica revealed as the fastest-growing company of the year in the Deloitte UK Fast 50 Awards, but we were also named Commercial Lender of the Year at the Bridging & Commercial Awards

We also completed £820m of business lending, helping to fuel the businesses that are the engine of the UK economy. We’d like to thank our broker community for the support you’ve provided us along the way. We’re looking forward to working with you in 2024 and beyond!

MEET THE TEAM

Nick Baker

Chief commercial officer 07702 290 363

Nick.baker@allica.bank

Anthony Newman

Senior specialist relationship manager, healthcare 07949 314 631

Anthony.newman@allica.bank

Bailey Rollins

BDM (South) 07564 580048

Bailey.rollins@allica.bank

Ben Green

BDM (West Midlands) 07535 061 376

Ben.green@allica.bank

Brian Bovell

Specialist relationship manager, healthcare 07498 442 680

Brian.bovell@allica.bank

Calum Johnston

BDM (Scotland) 07507 641 387

Calum.johnston@allica.bank

Charissa Chang

Head of broker sales – commercial mortgages (North and Midlands) 07494 596 184

Charissa.chang@allica.bank

Danny McMurdo

BDM (South West) 07943 184 754

Danny.mcmurdo@allica.bank

David Johnston

BDM (North West) 07546 694 262

david.johnston@allica.bank

Garry Wilkinson

Specialist relationship manager, healthcare 07958 370 153

Garry.wilkinson@allica.bank

Jonathan Prince

Senior commercial manager 07949 990 584

Jonathan.prince@allica.bank

Michael Horner

BDM (North East) 07983 129 652

Michael.horner@allica.bank

Michael Mann

Broker business development director (South coast) 07950 167 153

Michael.mann@allica.bank

Scott Clacher

BDM (East Midlands) 07934 107096

scott.clacher@allica.bank

Shay Stanford

Central BDM 07534 853 827

shay.stanford@allica.bank

Sophie Jones

Central BDM 07572 775 476

sophie.jones@allica.bank

Stephen Spinks

Head of broker sales – commercial mortgages (South and Central) 07943 184 749

Stephen.spinks@allica.bank