Specialist property lender Pallas Capital’s funding trust has hit $250 million in 10 months as its market share increases.
Launched in November 2021, the Pallas Funding Trust (PFT) is predominantly funded by Credit Suisse AG and it’s a major beneficiary of recent market shifts. It is the fastest growing Pallas Capital funding vehicle, having written $250 million of loans to date.
Pallas Capital estimates that non-bank lenders now account for 10% of the total of the Australian commercial real estate (CRE) loan book and believes the growth in non-bank lenders is driven by fundamental advantages, speed and certainty of execution as well as commercial flexibility in formulating loan parameters.
Pallas Capital executive director of lending Steve Lawrence (pictured above) said the non-bank lender only worked with leading mortgage brokers across Australia, which has helped it achieve the funding milestone.
“These brokers maintain relationships with potential borrowers and bring loans to Pallas Capital when the borrower is ready to proceed,” Lawrence said. “The mortgage brokers that we deal with know our lending parameters and help to pre-qualify borrowers, which in turn allows Pallas Capital to deliver loan commitments quickly.
“Pallas Capital expects the CRE loan book of the non-bank lenders in Australia to increase rapidly in coming years as it has done in recent years. Market observers believe that the CRE loan book in Australia is growing at about 5% a year, with the major banks loan books growing at about 3% per year.”
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Lawrence said Pallas Capital had been growing its loan book at over 100% per annum over the last five years.
“In the process, Pallas Capital has been able to secure cheaper institutional funding allowing it to price its loans more competitively,” he said. “Also, this funding remains available during periods of market instability, whereas other non-bank lenders relying on high-net-worth investors which have been required to curtail their lending activities.”
Lawrence said in July, the non-bank lender refinanced an existing loan in favour of Luxcon Group secured over its waterfront property in Port Melbourne.
“With funding from PFT and another Pallas vehicle, we increased the overall LVR from 60% to 70%, giving our borrower additional time to obtain planning consent for its proposed $84m mixed-use development on the site,” he said.
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“Similarly, we recently wrote two loans to the Buildtec Group in Adelaide (referred by Capital United) and are reviewing a third loan, taking total funding to about $70 million across three development sites in Adelaide. Once again, we were able to use PFT on a residual stock loan and another Pallas fund to produce a 70% LVR at a competitive lending rate, with these loans supporting developments with a total value of circa $100 million.”
Pallas Capital chief investment officer Dan Gallen said he did not expect traditional banks to reclaim CRE loan market share that had been gained by non-bank lenders, but anticipated it was more likely to be reflected in a tighter lending market for CRE borrowers.
“Softening property prices and slower off-the-plan sales or leasing rates will make cheaper bank funding harder to obtain,” Gallen said.
“Interest cover ratios [CRs] are also more demanding as lending rates increase and the banks typically set ICRs approximately 50% higher than non-bank lenders. The impact of rising interest rates on ICRs will be to further reduce the LVR at which banks will lend and so drive more CRE borrowers towards non-bank lenders.”
Credit Suisse APAC head of securitised products Will Farrant said PFT represented a new asset class for its offering in Australia.
“We have been very pleased to see the strong but disciplined growth that Pallas have delivered,” Farrant said.
“Passing the $250 million marker is a significant achievement and we look forward to PFT writing many more loans in the future with Credit Suisse funding. To assist this, we are working on ways to expand the scope of the PFT with the Pallas team.”
