Loan Origination
We finished the quarter, and the end of financial year, on a sound note with a total of over $1 billion in new settlements for the quarter, which takes total loan settlements to $3.167 billion for the financial year. A strong finish to a landmark year for the company.
The settlements for the quarter included 139 individual loans, with 109 first mortgage loans and 30 second mortgage loans. A total of $384.0 million (by limit) of construction loans were settled and $628.4 million on non-construction loans, which consists of pre-development, investment, residual stock and vacant land loans. Australia continues to be the largest portion of lending volume with 76% of settlements, New Zealand with 19% and United Kingdom with 5% for the quarter.
Loan repayments for the quarter were also significant with $408.5 million repaid. This takes the total loan repayments for the financial year to $1.97 billion (273 loans), which represents 43% of the current total FUM and is a significant amount of turnover and loan renewal, something that is important in a shifting market.
Our total loan book average term to maturity remains low at below 10 months. This means that our loan book generates significant liquidity through loan repayments relative to the size of the book.
Our lending continues to focus on high-quality credits, the loan book remains granular with a focus on diversification across geography and asset class. We believe this profile of the portfolio will prove to be beneficial for what we expect to be a more challenging environment.
Market Outlook
The cooling of the residential housing market in Australia continues to weigh down sentiment, with Sydney joining Melbourne in declining dwelling values and importantly slowing of growth in both Brisbane and Adelaide. As developers remain cautious, lending activity across new site acquisitions and new developments have slowed down.
One factor that appears to be turning positive is a rapid slowdown in construction cost inflation, with instances of a reduction in construction costs for some projects, although it is too early to regard this as a general trend.
As we have previously noted, the New Zealand market shows tentative signs that it has entered recovery phase, however the outlook remains modest with some locations and asset classes performing far better than others. A few larger institutional transactions for commercial property assets seem to indicate an opening of capital markets, but our caution remains on the price versus valuation expectations in the NZ market.
The lending market is cautious, and most lenders are dialling back risk and taking a more conservative view on the market outlook with LVRs moderating. There are some short-term liquidity concerns for some non-bank participants with more fluid capital bases reportedly experiencing high redemptions.
Dislocated markets (both credit and property) are typically good for Pallas where we see growth in our lending book as borrowers seek stable and reliable sources of capital. Our focus remains on ensuring we originate high-quality credits secured against ‘all weather’ valuations that remain robust even through short term volatility.
Status of the Loan Book
The loan book continues to perform well, and our default rate finished the quarter at 1.97% of FUM. At the end of the quarter there remained a total of five loans in default ($89.7 million), with one defaulted loan recorded in the previous quarter repaying in full and another loan now reclassified as Defaulted and non-performing.
The five defaulted and non-performing exposures include:
- An apartment project in Melbourne with the completed but unsold apartments continuing to sell down and repay the debt. On the back of the slower than expected sell down of the apartments and the softening market conditions, Pallas has obtained updated valuations of the security properties which indicate full recovery of principal but a partial loss of interest.
- Two New Zealand pre-development loans. Both loans have completed sales campaigns, and after prolonged negotiations, we expect to exchange a sale on both properties shortly.
- A vacant land site in Melbourne which had a sale, however that contract and sale has been withdrawn. The property remains as mortgagee in possession and will be taken to market for sale in the coming months.
- An investment loan in Wellington New Zealand; receivers have been appointed. The property has been sold and settled which has cleared the loan principal in full, with the balance of debt expected to be repaid.
A loan which remains on the watchlist is an investment loan in Melbourne and we are working through a repayment strategy with the borrower. A new loan was added to the watchlist during the quarter, being a pre-development loan in Wellington New Zealand; the borrower is taking the property through a sale campaign to sell the property and repay the debt.
As it has been a matter of considerable press coverage recently, we also specifically confirm that Pallas Capital does not have exposure of any kind to any part of the Bathla group.
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.