Loan Origination
Q1 2025 was a solid start to the year for loan originations, with settlements for the quarter totalling $602 million. This number is down from the previous two quarters (which produced record levels of settlements for Pallas) but factoring in an industry shut down over January and a challenging market, it was a pleasing result.
We remain on track to settle loans with a total value exceeding $2.75 billion this financial year.
We continue to see continued growth in our market share in New Zealand with new settlements for the period totalling $105 million. Our new NZ warehouse facility is backed by Westpac NZ and others and is managed by a best-in-class lending team. Pallas is well positioned to be a market leader in the NZ non-bank sector. In Q2 2025 we intend to launch our full suite of construction lending products, which we believe will further propel the business in New Zealand. Additionally, we have now opened an office in Christchurch to cater to South Island borrowers and the team have hit the ground running.
The new loans settled for the quarter were made up of 43 first mortgage loans and 13 second mortgage loans.
For the quarter we had over $229 million of loans repaid, which takes our total of loans repaid since inception to $4.6 billion without loss of capital or interest.
Market Outlook
The market continues to be flat and new investment activity remains subdued. Our read is that there is a level of pent-up demand in the Australian residential market, but buyers are waiting for that interest rate relief before they move forward. With the major bank economists all predicting multiple interest cuts over the course of 2025, we should see gradual improvement in sales activity which will bring some life back into the development market as previously shelved project starts are regenerated, and developers will be looking for new sites.
Whilst we’re not in the business of predicting markets, at this point a recovery in the residential market seems to be slow and steady; the two factors that could accelerate a recovery are interest rate reductions and access to credit.
At present, across the loan products that Pallas offers its borrowers, investment loans (stabilised assets) and pre-development loans (development sites) attract the most demand. The demand for investment loans from the non-bank sector reflects the very conservative LVR’s being offered by the banks on stabilised real estate assets, with the banks still preferring to size their debt according to an ICR (Interest cost ratio) rather than asset value. Our moderate gearing levels (average 66% on Investment loans) remains attractive to borrowers. Pleasingly, we have seen an uptick in demand for residual stock loans (approx. 20% of settlements for the quarter) as developers are more optimistic that their unsold stock will increase in value over the next 12 months as the buyer conditions improve.
Whilst our appetite for construction lending remains strong, as previously flagged in our updates, there is significant liquidity in the market looking to deploy capital to construction loans. We are seeing some solid transactions in the market, but lending terms appear to be aggressive, so our deployment remains at moderate levels
Status of the Loan Book
At the end of the quarter the loan book consisted of 49 construction loans and 277 non-construction loans, including 82 loans in New Zealand.
The loan book continues to perform well. In recent years our default rate has typically remained below 1.0% and, although it picked up slightly in late 2024 it is falling again and currently sits at 1.5%. We expect one defaulted loan to be repaid in coming weeks, returning the overall default rate to below 1.0%.
At the end of the quarter, we had four loans in default, resulting from one loan fully repaid in the quarter and one construction loan going into default (receivers have been appointed).
The four loans in default include:
- a construction loan in Sydney with receivers appointed;
- two New Zealand pre-development loans; we are currently negotiating a potential purchaser of the security property for one of these loans and the second will be taken to market for sale in Q2 2025; and
- a vacant land site in Melbourne, where we are currently negotiating a sale of the property and expect to transact a sale in mid-2025.
We remain confident that all monies owed on these exposures will be recovered in full.
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