Loan Origination
I am pleased to say that in FY25 overall we achieved $2.9 billion of new loans and other investments (including fully underwritten extensions) across 316 transactions, an average of $9.3 million per transaction. This represents an increase of 54% over the prior FY.
Loan settlement activity in Q2 2025 was relatively subdued with total settlements of $273.0 million (fully drawn limits). This number is substantially down from the previous quarter and reflects a relatively quiet market in Commercial Real Estate lending.
We continue to see rapid growth in our market share in New Zealand with new settlements for the period totalling $98.5 million. Pallas is well positioned to be a market leader in the NZ non-bank sector. In Q2 2025 we launched our full suite of construction lending products, which we believe will further propel the business in New Zealand.
The new loans settled for the quarter were made up of 66 first mortgage loans and 21 second mortgage loans. Split by loan type, about 44.9% were construction loans and the balance other loan types.
For the quarter we had about $27.7 million of loans repaid, which takes our total of loans repaid since inception to $5.3 billion (across 750 transactions) without loss of capital or interest.
Market Outlook
The market continues to be flat and new investment activity remains subdued. We still believe 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 remainder of 2025 and early next year, we should see gradual improvement in residential and commercial sales activity. In turn, this should bring some life back into the property development market, as previously shelved projects are reactivated and developers recommence looking for new sites.
In Australia, we are observing modest levels of new investment activity with acquisitions, mainly from ‘value buyers’ getting in before an anticipated market recovery. On the whole, our view is that commercial property has probably seen the worst and modest levels of growth will commence later this year (Melbourne may be the laggard here). Even the outlook for CBD Office, the most troubled asset class of this valuation cycle, is expected to move into recovery phase in most cities, in part due to multiple years of limited new supply.
In New Zealand, the property market remains challenging in some market segments. We are still seeing some pain in commercial assets being sold to cashed-up private owners on soft valuations. Vacancy rates remain high in most CBD’s for both office and retail assets, so caution is needed. Christchurch is somewhat out-performing the larger markets of Auckland and Wellington, which has resulted in a strong quarter of lending activity for our new Christchurch office.
At present, across the loan products that Pallas offers its borrowers, investment loans (stabilised assets) and pre-development loans (development sites) are attracting 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 Cover Ratio) rather than asset value.
Pleasingly, the recent uptick in demand for residual stock loans has continued (approx. 15% of settlements for the quarter) as developers are more optimistic that their unsold stock will be sold at acceptable prices over the next 12 months as 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 47 construction loans and 279 non-construction loans, including 86 loans in New Zealand.
At the end of the quarter, we had five loans in default, which is one additional to the last quarter. This loan is an investment loan in Wellington, New Zealand. The current default rate sits at 2.0% and pleasingly we have conditional contracts of sale for the security property on two of the defaulted loans (which accounts for half of the current default rate).
The five loans in default are:
- a construction loan in Sydney; the security property has been conditionally sold and full repayment is expected in Q3 2025;
- two New Zealand pre-development loans; we are currently negotiating a sale of the security property underpinning one of the loans, and for the second loan, we have reached heads of agreement for a significant pre-lease of the property with a national retailer and agents will take the property to market for sale in coming months;
- a vacant land site in Melbourne; the security property has been conditionally sold and full repayment is expected Q4 2025; and
- an investment loan in Wellington New Zealand; receivers have been appointed.
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