After years of asset price growth underpinned by ultraloose monetary policy, the party for commercial property seems to be over. A confluence of adversity is hitting the sector.

First came lockdowns with the locking up of customers that would otherwise frequent leisure, retail and office facilities. Tenants were statutorily protected from contractual obligations to pay rent and landlords were largely left to fend for themselves.

With lockdowns was also instilled the new habit of working from home. Demand for office space may have taken a structural hit from which it may not recover.

When we emerged from lockdowns, rubbing our eyes to make sense of the new world order, markets were then hit with a level of inflation not seen for forty years.

Amongst the manifold adverse consequences of lockdowns were broken supply chains and broken labour markets. They could not cope with resurgent demand. Fuel prices and other commodity prices rocketed. Matters were exacerbated by the outbreak of war in Ukraine.

Property markets generally benefit from inflation but not the concomitant interest rate increases with which it is accompanied. Interest rates have rocketed from their ultra-low levels, straining even modest levels of debt secured on property.

With income down and interest rates up, the commercial property market dived. And, not surprisingly, as interest rates increased, banks, pension funds and insurance companies retreated from lending to and investing in the sector. They had already had their appetite for property reduced by ever restrictive capital adequacy requirements and regulations.

Institutions dumped property and, like the structural change to tenant demand, they may not come back in a hurry.

To make matters even worse, owners of property are having to contend with a regulatory requirement to improve their commercial properties’ energy performance by achieving an EPC rating of C by 2027 and a rating of B by 2030. Some 60% of commercial property in the UK is rated at less than C and some 80% at less than B. This is a massive problem.

You might then ask yourself why bother with this capital intensive, under-funded and unloved sector?

Indeed, you would be right to be sceptical. A wall of property is going to need refinancing in the next 18 months – some estimates put this at £24 billion. Traditional lenders will not be able to cope. Their fear of vacant possession and need for debt amortisation will make it well-nigh impossible for borrowers to get the kind of loan to values they would need to survive the cycle. With this stress will surely come further write-downs in value.

The right call, for some time, is going to be to stay out of the market.

But there is a way to capitalise on the thirst borrowers have for financing – become a lender. Instead of buying property, lend against it and assist cash starved borrowers.

The returns to be earned from lending are now as high as the kind of returns which had been available from investing in the underlying assets. And, of course, it is less risky to lend than to buy.

A loan to value ratio of 65% would be seen as a high LTV by current market standards and very attractive for borrowers, but it comes with an inbuilt capital cushion of 35%. For investors who would typically have been investors in property, it is as remunerative as it was to be an investor, but much less risky.

That is precisely what my company, First Property Group, is doing. We are offering long term loans of 65% LTV, without the requirement for borrowers to amortise the debt. A loan at this level is about as high as it needs to be to refinance a historic 50%/55% LTV position, with values having already decreased by that amount.

And, if we are at close to the top of the interest rate cycle, which is likely, there may be a capital gain to be made on these loans when interest rates are reduced. They are like any debt instrument. Their value will increase if and when interest rates are cut.

With this property cycle, if you have the knowhow, you should be able to make good money with less risk, whilst also providing a valuable service for the market.

With adversity always comes opportunity.