In a perfect world, everyone would like to own the finished article. A well-located, newly refurbished building with strong tenants, dependable income and very little maintenance is never going to be a difficult investment to justify, and there will always be strong demand for assets like that.
The trouble is, everybody else can see exactly the same thing, and by the time a building reaches that stage, much of the opportunity has already been recognised and priced accordingly. That certainly doesn’t make those buildings any less attractive, but I think some of the more interesting opportunities begin a little earlier, when there is still work to do and genuine value left to create.
Looking beyond what you see today
It’s very easy to judge a building based on what you see when you walk through the door. I think the more useful mindset is to ask what that building could look like three or four years from now, because that’s often where the real opportunity starts to emerge.
Sure, the building gets your attention because that’s the bit everyone can see. What really tells you whether an opportunity stacks up is its potential. How does the borrower intend to improve it? Where will additional income come from? What changes over the life of the loan will make this a stronger asset than it is today? Those are the questions worth spending the most time on.
That’s certainly how we look at opportunities at LHV Bank. Of course, the building itself is important, but we spend just as much time understanding the borrower, the commercial rationale behind the transaction and the plan for the asset over the life of the loan. Two borrowers might be looking at very similar buildings, but if one has a clear strategy to improve the asset and the other doesn’t, they’re no longer asking us to support the same opportunity.
Looking beyond today’s asset
None of that is to suggest prime assets have somehow become less attractive. They haven’t. Carter Jonas’ Commercial Market Outlook highlights that occupier demand continues to focus on modern, energy-efficient buildings, while a relatively constrained development pipeline is helping to support rental growth across several parts of the market.
The point, though, is that commercial property is rarely static. A building that looks ordinary today may be a much stronger investment three or four years from now if the borrower has a credible plan to improve it. Buildings are refurbished, tenants change, leases are restructured and rental income evolves over time. That’s why we don’t just assess where an asset is today, but where it’s heading.
Take a building with a higher vacancy rate than you might normally expect. On paper, it could look like a weaker proposition. But if the borrower has already started refurbishing vacant space, has active discussions with prospective tenants and can clearly demonstrate how occupancy and income will improve over the next few years, you’re looking at a very different lending proposition. The building hasn’t changed overnight. The business plan changes the way the opportunity should be assessed.
Creating value is rarely accidental
In my experience, very few commercial assets stand still for long. Leases expire, occupier requirements evolve, buildings need investment and local markets change. So, the question isn’t whether an asset will need to adapt, it’s whether the borrower has a credible plan to manage that change successfully.
That’s why active asset management has become such an important part of commercial property investment. Improving lease structures, refurbishing accommodation, investing in energy performance or rethinking how space is used can all strengthen the long-term resilience of an asset. Those improvements don’t happen by chance, they come from understanding the opportunity, recognising the risks and having a sensible plan to improve the building over time.
And those are exactly the discussions we enjoy having with brokers and borrowers. Rather than focusing solely on today’s valuation, we want to understand where the asset is heading and whether the proposed strategy genuinely makes commercial sense.
Looking beyond the obvious
For me, that’s what good commercial lending looks like. The property itself will always matter, but it’s also about understanding the borrower, their experience and their plans for the asset. Get that right and a good asset today can become an outstanding one tomorrow. That’s why I’d always rather spend more time understanding the plan than simply admiring the property.
