Loan Origination
We finished the quarter on a strong note with a total of $767 million in new settlements for the quarter.
The settlements for the quarter consisted of 137 individual loans, with a total 113 first mortgage loans and 24 second mortgage loans. A total of $202.7 million (by limit) of construction loans were settled and a total of $564.2 million on non-construction loans, which consists of pre-development, investment, residual stock and vacant land loans. By geography we settled $622.1 million (or 81%) in Australia and New Zealand recorded $94.6 million (12%) and United Kingdom $50.1 million (7%) for the quarter.
Loan repayments for the quarter remained high at $338 million in total loans repaid. Our total loan book average term to maturity remains low at below 10 months.
Market Outlook
Private credit has endured a volatile period with liquidity becoming the key risk for managers. We observe that the CRE debt market has bifurcated over this period, the lenders with more permanent institutional capital are withstanding the volatility and continue to lend and those with short term funding sources face more precarious positions working through both challenged loans and investors that want their money back.
Pallas’ funds all remain open and redemptions in the wholesale funds are well contained. Pleasingly, over the past quarter we have obtained multiple approvals to increase the limits of our institutional backed funding warehouses in Australia and New Zealand, with a total approved increase in limits of $320 million.
This will take the total of our institutionally approved facilities to $2.15 billion, which is a great endorsement from our institutional financiers who see both the long-term viability of CRE debt and the performance of Pallas Capital as a manager.
As a result, Pallas continues to fund the stronger loans that we like and at more favourable terms for Pallas with LVR’s reducing and interest margins increasing. Certainly, in the Australian market, borrowers are more focused on the availability of capital rather than its cost and this allows us to be selective with the credits we originate and to generate strong returns.
Valuation is our key focus for credit underwriting in the current market, both for new loans and those loans which we decide to extend. Over 77% of the underlying security properties in the Pallas Capital portfolio have an independent valuation completed within the past 12 months.
Commercial property values appear to have bottomed out and stabilised though this is sector dependent and gradual in some locations. In Australia, residential property values continue to soften nationally as the impacts of the federal budget and interest rate hiking take hold, although there is evidence that in recent months residential apartment prices have performed better than house prices. Our expectation is that the value decline will be more prominent in secondary locations and ‘mortgage belt’ areas across all states.
For the loans on our books with active sales (construction and residual stock loans), the data supports the broader slow-down in buyer activity, but prices are holding up at or near valuation (Melbourne remains the softest market for price point). Some borrowers are providing small discounts (5-10% below valuation) for multiple sales and the stock is moving.
We also continue to see a softening in construction costs, with a number of builders and sub-contractors now looking to fill in gaps in their forward pipeline.
Whilst the headwinds are evident and buyer confidence is low (this will only improve based on the RBA’s decisioning), we balance this outlook with strong underlying fundamentals of tight vacancy rates and lack of new supply which may provide some form of backstop to property values. In any event, we will continue to be selective with our security properties and monitor the market movements accordingly.
Status of the Loan Book
Defaulted and non-performing exposures closed the quarter at 1.56% of the total investment book. At the end of the quarter there remains five exposures in this category ($79.6 million). No new exposures have been recorded as Defaulted and non-performing in the period, with progress continuing on the existing exposures as outlined below.
The five Defaulted and non-performing exposures include:
- A construction exposure for an apartment project in Melbourne with the unsold apartments continuing to sell down and repay the debt.
- Two New Zealand pre-development loans. Both loans have completed sales campaigns to sell the security properties, one sale is under exclusive due diligence with a buyer and the second is more advanced and a contract of sale is being drafted.
- A vacant land site in Melbourne will be sold via mortgagee in possession. Agents have been appointed and a sale campaign will commence shortly.
- 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.
One exposure was added to the watchlist during the period. The exposure is secured by a first mortgage over a pre-development site in Wellington, it has reached maturity and the borrower has been unsuccessful in procuring a refinance. The facility is well secured, and we do not expect any loss.
A loan which remains on the watchlist is an investment loan in Melbourne and we are working through a loan restructure with the borrower which includes additional security.
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.