In our previous commentary we anticipated a pick-up in lending volumes for the September quarter. We thought that this would result from a growing belief that we were near the high-point for the Official Cash Rate, a slowdown in construction cost inflation and a reasonably strong market for residential strata sales.
This pick-up did not eventuate, and the slowdown of transaction volume continued into the September quarter.
Accordingly, Pallas Capital had a total of $360 million of loans repay during the quarter and settled $225 million of new loans. Pleasingly, a good portion of the loans repaid are construction loans that reached completion in what has been a difficult 24 months for the construction industry.
Like other lenders in the market, Pallas Capital remains cautious with new construction lending (only $8.8 million of total new construction loans settled for the quarter), preferring to see some further risk come out of the market.
We do believe that the construction sector seems to have turned a corner with improved labour and cost conditions. Current vintage construction loans are proving to be superior credit quality and we are seeing some strong transactions come through our origination team as well-capitalised developers start to come out of their slumber and commence new projects.
We are also seeing some modest green shoots in residential pre-sale activity, in particular projects aimed at the downsizer and professional couple buyer profiles. We anticipate our construction loan settlement volumes to increase in Q4 2023 to Q1 2024.
Lender liquidity in the non-bank credit market remains tight and this has been favourable for the well capitalised lenders such as Pallas Capital. A lot of small non-bank lenders are being squeezed by investor redemptions and unable to backfill this with new investment capital, and therefore unable to extend loans to borrowers.
This has driven a significant increase in refinance activity across the market and at attractive margins as borrowers become more concerned with the availability of credit, rather than the cost.
We foresee this trend continuing and anticipate that some lenders may have significant issues with funding future loan commitments.
We believe that Pallas Capital will be a beneficiary of these conditions, and we are on the lookout for refinance opportunities for attractive credits.
At the end of the quarter, Pallas Capital had approx. $430 million of undrawn funding lines and we expect existing loans with a total value of about $70 million to repay in the current quarter.
Status of the Loan Book
The loan book continues to perform well and remains robust. At the end of the quarter, only one loan ($2.4 million) is in default, and we have zero payment arrears and only two loans (total $7.2 million) on the watchlist. The default and watchlist loans represent 0.77% of the loan book (by value).
The loan in default is for a Queensland retail property that is in late-stage negotiation for sale. We are confident that all monies owing on this loan, plus the watchlist loans, are well secured and will be recovered in full.
One project that was previously a watchlist loan has now reached practical completion and settlement of pre-sold apartments (and repayment of our loan) is now underway.
The loan book consists of 34 active construction loans and 167 other loans. All are performing satisfactorily. Whilst the hard work has paid off managing the loan book, we remain vigilant in navigating through any risks with all loans in the portfolio.