Loan Origination
A strong finish to the 2025 calendar year with a total of $861 million of new loans and long-term extensions settled for the quarter. This was across 108 individual loans, including 78 first mortgage loans and 30 second mortgage loans.
Over the quarter a total of $319 million (by limit) of construction loans were settled and a total of $542 million of non-construction loans, which consist of pre-development, investment, residual stock and vacant land loans.
Loan repayments for the quarter were also high at $625 million. The average term to maturity remains low (approx. 9 months), which gives some protection of the portfolio against future market movements and ensures a high volume of loan repayments, which in turn fund new loan commitments.
In the quarter we launched Pallas Funding Trust No.6 (PFT6), which is majority funded by an AA rated Australian bank. PFT6 will focus on non-construction loans between $500,000 and $7.5 million and complements our other institutionally-backed lending warehouses which target larger loan sizes. Importantly, it also provides great diversity to our loan book, lowering concentration and improving the granularity of the portfolio.
During the quarter our New Zealand business settled a bumper $210.7 million of loans. The NZ property market (Auckland in particular) is beginning its modest recovery into the next cycle and transaction activity is improving.
Another exciting milestone for the business was the first loan settled in the UK. Our London office opened during the quarter with the first loan settled and a strong pipeline of loans to be written in 2026. The UK business will focus on the same mid-market commercial real estate debt segment as our Australian and New Zealand businesses, specialising in bridging and development loans.
Market Outlook
The property market did show signs of modest improvement in some geographies and asset classes. A general recovery cycle seemed to have started in Australia and New Zealand, although this may be affected in Australia by the RBA increasing the Official Cash Rate by 25 basis points in late January, with possibly more increases to come.
Strong borrowers in New Zealand are taking advantage of the dramatic interest rate easing, with the OCR sitting at 2.25% (from 5.5% in July 2024) and real estate economics beginning to look healthier.
In Australia the credit markets continue to remain very liquid, with borrowers getting competitive terms from both the banking and non-bank markets. In particular, we have seen significant rate compression on construction loans and what seems to be a structural shift in leverage, with most non-banks now offering first mortgages up to 70% LVR of the on-completion value. The major banks have also increased their leverage beyond the traditional 65% LVR on-completion value for good development transactions.
Status of the Loan Book
At the end of the quarter the loan book consisted of 63 construction loans and 246 non-construction loans, including a total of 82 loans in New Zealand.
The loan book continues to perform well. The default rate finished the quarter at about 2.2% and currently sits at 1.5% (as one defaulted loan was fully repaid in January 2026 including all loan principal, interest and fees).
Currently we have five exposures that are Defaulted and Non-Performing[1]. This is unchanged since the last quarter, with one additional exposure in Melbourne (three loans secured by multiple security assets to one common sponsor group) replacing the loan that repaid in January.
The five defaulted and non-performing exposures are:
- two New Zealand pre-development loans; in both cases Pallas is currently negotiating sale offers with respective buyers;
- a vacant land site in Melbourne; we have now exchanged a contract of sale for the security property, with settlement scheduled for March 2026; the sale price will repay our debt and interest in full;
- an investment loan in Wellington New Zealand; receivers have been appointed; and
- (the new loan on this list) an investment loan in Melbourne; the assets will be taken to market for sale; based on updated valuations, we do not expect any loss of loan principal, interest or fees.
In addition to the defaulted loans, we have one construction loan for an apartment project in Melbourne that is on our watchlist. The completed and unsold apartments continue to sell down and reduce our loan.
We remain confident that all principal and standard rate interest owed on these exposures will be recovered.
[1] Defaulted and Non-Performing loans include loans that are +90 days past due, or there is a breach of loan covenants and/or material conditions. This test is adapted from the APS 220 Credit Risk Management framework.
If you are looking to deploy capital into any of our current Open for Investment debt opportunities, please contact your Pallas representative or contact clientservices@pallascapital.com.au