SME Growth Index Series: Property downturn bites business owners

Our Scottish Pacific SME Growth Index is a twice-yearly snapshot of Australia’s small to medium sized business sectors showing cashflow issues that many businesses face today, below is the first of six key insights found in our March 2019 report:

Current property market conditions are clearly having an impact on business owners.

Almost half the SMEs (44.5%) say property market conditions are already making it harder for them to access business funding, likely due to softening house prices in major markets.

A further 35% haven’t yet felt the impact, but fully expect the housing price correction and broader property market conditions including slowing loan approvals will have a significant impact on their borrowing capacity.

When property market impact was last assessed in September 2017, 3 out of 4 SMEs said property prices were having no direct impact on their businesses. This round, only 1 in 5 SMEs said they had not yet seen a direct impact.

This minority of non-affected SMEs perhaps reflects how broad the base of Australia’s small business sector is, with more than two million enterprises across a wide range of industries and regional markets.

Property prices are having more impact on SMEs in Victoria and NSW (affecting 48% and 46% respectively), with Queensland small businesses (39%) the most buffered.

Declining or no-change SMEs are being hit harder by property market movements, with 54% of non-growth SMEs already impacted (compared to 36% of growth SMEs).

For these non-growth SMEs, finances are already stretched thin and they are feeling “when it rains it pours”. These are the businesses that currently need the most support to get through tough market conditions.

SMEs willing to pay more to avoid property security

More than 91% of SMEs would be prepared to pay a higher rate to obtain finance if they didn’t have to provide real estate security. This overwhelming sentiment is voiced at a time when a sharp correction in residential property prices is affecting capital cities, coupled with falling building approval data and predictions by analysts such as Core Logic and UBS of tough market conditions still to come.

Of the nine out of 10 business owners who say they would be willing to pay a higher rate for finance if they could avoid using property as security, almost two-thirds (65%) indicated they ‘definitely’ would be willing, and more than a quarter (26%) said ‘probably’.

Fewer than 1% of SMEs ‘definitely’ would not consider higher rates in place of borrowing against the family home, and just over 1.5% said it would be ‘unlikely’.

According to the Productivity Commission’s draft report into Australian financial system competition, a third to a half of Australian SME loan value is reliant on property security.

For the major banks, 35% of their small business lending (by loan value) is secured by real estate. For banks outside the majors this figure is higher, at almost 47%.

Given this data, and the Growth Index’s clear findings about SMEs’ unhappiness about using property security, it could be that many business owners are unaware they can use balance sheet assets instead of property – assets including equipment and invoices issued.

Property security one of top two frustrations

Annoyance about having to provide property as security was clear amongst SMEs – this was the second most common funding frustration (nominated by more than 78%), behind only loan conditions (just over 80%).

To this environment, add likely changes implemented due to the Royal Commission, and the impact of more stringent credit checks. SMEs looking to fund growth will have to factor in potential roadblocks around finance availability and using property as security.

The added impact of home borrowers potentially being charged fees to use a mortgage broker could also result in a major reshuffle when it comes to how small business owners manage their business growth.

Australian Bureau of Statistics data shows a more than 6% drop in home loans in December 2018, with a fall of about 20% for 2018 (the worst annual fall since the Global Financial Crisis).

While property prices and some market conditions are cyclical, it’s important to note Australia’s long-term downtrend in the rate of home ownership.

A not-too-distant future where there may be more entrepreneurs renting than buying means that increasingly business owners will have to consider business borrowing secured against assets other than property.

More stringent lending conditions, along with a cooling property market, will impact on SME owners who need to use their home as security against their business borrowing.

For any business owner who feels compelled to rely on providing property as security for their business loans, the credit squeeze may well be on.