Loan Origination
In recent months we have refinanced our main Australian lending warehouse with Goldman Sachs coming into a senior position, and our main New Zealand warehouse with Westpac now being our primary funder in that market.
These loan warehouses now have wider lending mandates and significantly lower cost of funds. We have reflected these changes in offering more flexible and cheaper funding to our borrowers and we are already seeing an acceleration of lending volumes as a result.
In the September quarter a total of $435 million of new loans were settled. Following on from a strong start to the year, the first nine months of 2024 have seen a total of over $1.2 billion in new loan settlements.
We settled 63 new loans in the quarter, made up of 48 first mortgage loans and 15 second mortgage loans. The loan book remains highly granular with low concentration risk.
Over the quarter a total of $198 million (by limit) of construction loans were settled, representing approx. 46% of total settlements, which is in line with the whole portfolio ratio.
Our New Zealand business has now become a significant contributor to the origination tally with $132 million of new settlements for the quarter. Since launching the NZ business in late 2022, we have settled a total of $478 million of loans in that jurisdiction.
Q3 also saw a significant amount of loan repayments with a total of $209 million repaid.
Market Outlook
The market is gradually becoming more optimistic although new site acquisition activity remains at very low levels for developers and investors. We remain watchful in our selection of site funding (pre-development and vacant land loans) and ensure that these loans have a strong exit position based on current-day feasibilities with good fundamentals.
As in the previous quarter, most of the settled loans for this quarter were refinances, with a lot of developers opting to push back project commencements.
Borrower demand remains high for construction lending and, whereas there was limited lender appetite for these loans in 2023, there is significantly more liquidity in the market as many existing construction loans reach completion and repay and non-bank lenders are looking to backfill their loan books.
This has created a two-tier market, with competitive lending conditions for strong credits, but still a paucity of funding available for weaker credits.
Our loan book remains very short duration (8.6 months weighted average term to maturity), which allows us to continuously ‘mark-to-market’ our loans as they reach maturity and we decide which loans we wish to extend and retain and which we wish to exit.
The $209 million of loans that were repaid this quarter represents approx. 13% of the total loan book, which is a significant turnover. Over the next two quarters, we have over $648 million of loans that will reach maturity and will be repaid or undergo a credit and valuation review of each loan where the borrower wishes to extend.
Valuation risk remains the silent killer of commercial real estate lending in this cycle of the market. Lenders will often hold onto impaired loan exposures as a result of the underlying asset value deteriorating, resulting in actual LVR positions far greater than when the loan was underwritten. Ensuring our underlying assets are marked to current day valuations remains a critical focus, and at present over 71% of the security assets in our loan book have been valued within the last 18 months.
Status of the Loan Book
At the end of the quarter, Pallas Capital has 47 construction loans and 208 other loans, including 69 in New Zealand, on foot. The loan book performance remained sound throughout the last quarter.
There are now four defaulted loans in the portfolio (two from the last quarter and two additional).
Of the three defaulted loans referred to in the last quarterly update:
a) the loan against a retail property in Queensland has been repaid in full; and
b) one of the two loans against New Zealand pre-development property in Auckland is expected to be repaid in the near future (a contract of sale over the security property has been exchanged) and a receiver is in place in relation to the other.
Also, the construction loan referred to previously (builder in administration) has been restructured with the borrower posting additional equity and a new builder appointed.
The two new loans in default relate to a construction project in Melbourne (balance owing of $51 million) and a vacant land site in Melbourne (balance owing of $6.23 million).
With regards to the construction project, Pallas and our consultants are actively managing the project, with a new builder appointed. This project is well advanced and should be completed in Q2 of 2025. There are substantial pre-sales in place, and more in negotiation, and the Pallas Capital loan will be paid out by pre-sales (and a residual stock loan, if needed).
We are confident that all monies owing on these loans are well secured and 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