Funding trust hits $250m milestone in short sprint

Although individual banks have differing policies on lending, the consensus is that the growth of commercial real estate loan books with the major banks is stalling amid tighter lending restrictions and their apparent lack of appetite for the business.

Pallas Capital executive director Steve Lawrence said the latest of its vehicles, the Pallas Funding Trust, was launched in November 2021 and was the fastest-growing Pallas Capital funding vehicle, having already written $250 million of loans.

Lawrence said the trust was predominantly funded by Credit Suisse AG and had been a major beneficiary of recent market shifts.

“In July we refinanced an existing loan in favour of developer Luxcon Group secured over its waterfront property in Port Melbourne, which was the third such deal with the borrower,” he said.

“With funding from the trust and another Pallas vehicle, we increased the overall loan-to-value ratio (LVR) from 60 per cent to 70 per cent, giving our borrower additional time to obtain planning consent for its proposed $84 million mixed-use development on the site.”

Will Farrant, head of securitised products for APAC at Credit Suisse, said the Pallas trust represented a new asset class for Credit Suisse in Australia, and “we have been very pleased to see the strong but disciplined growth that Pallas have delivered”.

He said Credit Suisse was working on an expansion path with Pallas, adding that passing the $250 million marker was a “significant achievement” at a time when lending restrictions were tightening.

Pallas Capital is the parent company of private real estate financier and investment manager Pallas Capital and has a current loan book of $1.37 billion across 169 loans.

It is also the parent company to property development manager Fortis, which is developing sites such as the $185 million development at 2-10 Bay Street and 294-298 New South Head Road in Sydney’s east.

Pallas Capital estimates that non-bank lenders account for 10 per cent of the total of the Australian commercial real estate loan book and believes the growth in non-bank lenders is driven by fundamental advantages.

These include speed and certainty of execution as well as commercial flexibility in formulating loan parameters.

Pallas Capital chief investment officer Dan Gallen said he did not expect traditional banks to reclaim their share of the commercial real estate (CRE) loan market snared by non-bank lenders, but anticipated any changes were more likely to be reflected in a tighter lending market for CRE borrowers.

“Softening property prices and slower off-the-plan sales or leasing rates will make cheaper bank funding harder to obtain,” Gallen said.

“Interest cover ratios (ICRs) are also more demanding as lending rates increase, and the banks typically set ICRs around 50 per cent higher than non-bank lenders.”

Gallen added that the impact of rising interest rates on ICRs would be to further reduce the LVR at which banks will lend, driving more CRE borrowers towards non-bank lenders.

As non-bank CRE lending rates continue to increase while loan parameters tighten, Pallas Capital anticipates its funding vehicle will continue its strong trajectory of growth.

Reflecting the diversity in demand for the non-bank loans, Pallas recently financed the Buildtec Group in Adelaide and are reviewing a third loan, taking total funding to about $70 million across three development sites in Adelaide.

View article on Sydney Morning Herald