Non-bank fund to focus on borrowers ‘who slip between cracks’

Pallas Capital has secured more than half a billion dollars of funding from Credit Suisse to provide small commercial property loans for developers and investors that “slip through the cracks” of the mainstream banks and other non-bank lenders.

The non-bank’s Pallas Funding Trust will provide short-term loans of between $1 million and $10 million for borrowers needing funds to acquire development sites, finance unsold residual stock or for investment purposes, but will not provide construction financing.

Pallas Capital chief investment officer Dan Gallen said a typical borrower might be a developer buying a block of land or amalgamating sites for a project or seeking finance for a value-add investment such as the refurbishment and re-leasing of a commercial property.

“We’re focused on lending to borrowers who slip between the cracks, who are not serviced by the major banks,” Mr Gallen told The Australian Financial Review.

Backed by Credit Suisse warehouse funding, Pallas Capital has secured an initial $530 million to lend through the new trust, with plans to increase that amount to cater for expected strong demand.

Loan-to-value ratios will be about 70 per cent for first mortgage loans typically ranging from 12 to 36 months’ duration and the interest will be about 6 per cent a year.

Origination will be through mortgage brokers. Pallas Funding Trust will write its first loans this week.

“This market segment, whilst under-serviced at present, features substantial lending volumes given that most commercial properties have a value in the range of $1 million to $15 million. PFT has been designed to focus its lending business in this borrower segment,” Mr Gallen said.

“In addition, the loan types that PFT funds, such as value-add investment loans, residual stock and pre-development loans, are the loan types the banks have limited appetite to fund.”

Mr Gallen said he was unaware of any other non-bank lenders providing this type of lending, funded by an institutional player such as Credit Suisse.

“This market is typically serviced by fund managers and investment manager backed by family offices.”

Having a funding partner such as Credit Suisse, Mr Gallen said, meant the trust would be able to lend through various market cycles without disruption, including downturns such as those during the pandemic.

“[For non-bank lenders funded by retail or high-net worth investors] investment flows can shrink quickly if sentiment deteriorates, as it did in the first COVID-19 lockdown in 2020, leaving a significant pool of borrowers without commercially attractive loan options,” he said.

While the trust will not provide construction loans, approved borrowers will be able to source construction funding through Pallas Capital’s other lending businesses, which are writing about $50 million a month in new loans.

Since being established five years ago, Pallas Capital has settled $1.2 billion across 181 loans and other funding arrangements.

Having settled 81 of these loans, its current loan book stands at $808 million across 100 transactions.

Pallas Capital is a subsidiary of the Pallas Group, which also includes developer Fortis.

Read article on AFR

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