Loan Origination
New loan settlements were generally subdued during the quarter, as January and February are traditionally slow months for the industry, resulting in $543 million in new loans settled during this period. This was across 71 individual loans for the quarter, with a total 60 first mortgage loans and 11 second mortgage loans.
A total of $168 million (by limit) of construction loans were settled and a total of $375 million on non-construction loans, which consists of pre-development, investment, residual stock and vacant land loans.
Loan repayments for the quarter were $285 million, taking the rolling half year total repayments to $910 million or 25% of the total loan book. Our total loan book term to maturity remains low at 8.25 months.
The loan book remains well balanced with total non-construction loans representing 58% of the total Pallas portfolio, versus 42% of construction exposure.
Market Outlook
The market outlook remains subdued in Australia with interest rate rises cooling the housing market. The commercial property market in Australia remains bifurcated with some sectors performing well and others in early recovery phase, but the rising interest rate environment is expected to slow that recovery as buyers reassess valuations against the background of interest rates.
The conflict in the Middle East continues to impact cost escalation on active development projects. Civil work and other input costs linked to crude oil remain the most impacted. Across our portfolio, most contractors with active projects are absorbing these costs with a view that the conflict will not be prolonged. Conversely, we are seeing a lot of ‘repricing’ of works for new builds which are yet to commence. Contractors are cautious on long term contracts, and some contractors are revisiting tender prices, even for awarded jobs. This is most pronounced in markets with limited contractor competition (such as Brisbane).
This cost escalation on new jobs is putting pressure on new project starts and, with a softening of ‘on-completion’ values (both residential and commercial), new development feasibilities are vulnerable. We remain cautious on the market for new builds and continue to support projects with good fundamentals, stabilised project costs and underlying buyer demand.
Status of the Loan Book
The loan book continues to perform well. Our default rate finished the quarter at 1.18% and currently sits at approx. 0.95% (the reduction reflecting a defaulted loan that fully repaid in April 2026).
At the end of the quarter there were five loans in default ($55.7 million) and no new defaulted loans for the quarter. One defaulted loan has subsequently repaid, and one loan is on to the watchlist.
The four default and non-performing exposures (excluding the loan repaid in April) include:
- Two New Zealand pre-development loans. Both loans have completed sales campaigns, and we are 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. Settlement of the sale has been extended to Q3 2026, and the sale price will repay our debt and interest in full.
- An investment loan in Wellington New Zealand; receivers have been appointed. The property has been sold, and we do not expect any loss on this exposure.
We have two watchlist loans, one a construction loan for an apartment project in Melbourne with the unsold apartments continuing to sell down and reduce our loan. We continue to monitor the exit and full repayment of this loan, however the slowing of the Melbourne market is slowing the sell down of the apartments. The second and new loan added to the watchlist is an investment loan in Melbourne and we are working through a repayment strategy with the borrower. We do not expect any loss on this exposure.
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
Disclaimer: General information only. Pallas Capital’s lending activities are limited to writing loans for business and/or investment purposes only. The consumer credit protections in the National Credit Code do not apply.