Loan Origination
A slow quarter for loan originations with a total of $681 million of new loans settled in Q3. This reflects a subdued commercial real estate loan market and high levels of liquidity across many non-bank participants. Pleasingly, we have seen a strong uptick in our pipeline since the start of October 2025 which should see a strong finish to the calendar year.
The improved pipeline is partly a result of Pallas Capital closing a $500 million senior debt funding warehouse with Morgan Stanley in August 2025. This is our fourth active institutionally backed lending warehouse. Pallas Funding Trust No. 5 (PFT5) will make first mortgage loans between $15 million and $35 million (and higher) across our non-construction lending products, including pre-development loans, residual stock loans and investment property loans. PFT5 has a wider lending mandate than our existing funds and a significantly lower cost of funds.
We settled 52 new loans in the quarter, with a total of 40 first mortgage loans and 12 second mortgage loans. Over the quarter a total of $446 million (by limit) of construction loans were settled, which takes our total book of active construction loans to approx. $1.2 billion or about 35% of the whole book.
Our New Zealand business continues its steady state, despite a challenging market, with over $53.4 million in loans settled for the quarter.
Market Outlook
The market remains subdued with limited new acquisition activity from developers and property owners.
With a consensus view that commercial property values have largely bottomed, we expect to see a modest improvement in buyer activity for existing commercial property assets. The two main areas of the market we expect to move first with increased activity are 1) prime assets, being acquired by REIT and large institutional asset managers with ‘dry powder’; and 2) opportunistic / value add real estate, being acquired by private investors and experienced fund managers attracted by high yields, asset valuations below replacement value and a lower (and still falling?) interest rate environment. The current outlook for property sales appears more stable than we have seen for the past 18 months.
The outlook for developers remains challenging, although some market segments are faring better than others. The general view is that some developer feasibilities remain tight, and we don’t expect to see significant transaction volumes until selling prices of completed stock (project end values) begin to rise. Pallas’ main focus remains on funding projects in the residential and industrial sector. For residential we are focussing on downsizer, boutique projects in tightly held metro locations with a historical lack of supply. For industrial we are focused on markets with tight supply and low vacancy rates.
Status of the Loan Book
At the end of the quarter the loan book consisted of 46 construction loans and 254 non-construction loans, including a total of 85 loans in New Zealand.
The loan book continues to perform well with an improvement in our overall default rate, which currently sits at just under 2.0%. At the end of the quarter, we had five loans in default, which remains unchanged from last quarter. The five loans in default include:
- A construction loan in Sydney with receivers appointed. We have exchanged a contract for the sale of the security property with settlement scheduled for December 2025. The sale price will repay our debt and interest owed in full.
- Two New Zealand pre-development loans. The security property supporting one loan is currently being marketed for sale by agents. For the second loan, the sale agents have completed the campaign for a sale of the security property and we are negotiating a contract of sale with a preferred buyer. The sale price of both properties will repay the associated debts and interest owed in full.
- A vacant land site in Melbourne; we have now exchanged a contract of sale for the security property. Settlement of the sale is scheduled for March 2026, and the sale price will repay our debt and interest in full.
- An investment loan in Wellington New Zealand; receivers have been appointed.
Accordingly, of the five defaulted loans, repayment of two loans is supported by executed contracts of sale, a contract of sale to repay a third loan is under negotiation, and two other loans are working their way through receivership.
In addition to the defaulted loans, we have one construction loan for an apartment project in Melbourne that is on our watchlist. The project has reached practical completion, and settlements have occurred (with our debt substantially repaid), however not all apartments are pre-sold. We continue to monitor the exit and full repayment of this loan.
We remain confident that all principal and standard rate interest owed on these exposures will be recovered.
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