Pallas hitting stride in tougher market

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With funds looking for quality investments, non-bank CRE lender Pallas Capital is opening up to a wider broker base, thanks to a key collaboration

PALLAS CAPITAL is setting the pace for commercial real estate (CRE) lending in the post-pandemic economy, even as traditional lenders struggle to adjust. Just when higher interest rates and a softening property market are making cheaper funding from regular banks harder to obtain, Pallas is expanding its base of brokers by joining the PLAN/Choice/FAST (‘PCF’) and Loan Market aggregator panels as a panel lender. “We can now offer our products to a wider audience of brokers,” says Pallas executive director of lending Steve Lawrence. The development comes on the heels of an increase in CRE funding market share for the non-bank over the last year, partly thanks to its Pallas Funding Trust (PFT). Launched in November 2021, the PFT has rapidly become the fastest-growing Pallas Capital funding vehicle with $250m in loans written to date.

Pallas Capital specialises in the origination and investment management of structured debt and equity products, providing bespoke finance solutions to borrowers seeking reliable and competitive funding for commercial and residential assets and development projects. It then offers financial investments in these loans to its investors, providing strong returns to its investor base through a range of risk-adjusted, property-backed debt and equity investment opportunities. Pallas Capital has a current loan book of $1.37bn across 169 loans.

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Steve Lawrence, Pallas Capital

Until recently, the non-bank only worked with a select group of brokers each year. But the Pallas doors are now being thrown open, with PCF and Loan Market representing approximately 40% of the commercial broker market in Australia. “As the largest commercial aggregator business, this will give Pallas a wider broker base to be able to assist with its loan products,” says Lawrence.

Dan Gallen, Pallas Capital

Royal coffers A key point of difference for brokers is that Pallas has secured funding from a range of sources, a crucial point in a market in which the tide seems to be receding and the lending criteria of traditional banks are becoming ever tighter as the interest rate cycle ramps up. “We have access to various funding sources from high-net-worth individuals and Family Office capital, wealth manager/financial planner channels as well as institutional investors,” says Lawrence. But it's the $588m PFT institutional warehouse facility that sets Pallas apart. Available to deploy into its pre-development, residual stock and investment loans, the PFT is predominantly funded by Credit Suisse AG, providing increased stability in the current economic environment when compared to institutions that operate with a significant level of high-net-worth investment capital. Credit Suisse and Pallas are currently working on ways to expand the scope of the PFT after passing the $250m marker just nine months following its launch. “Pallas Capital also has in excess of $380m under discretionary management,” says Lawrence.

Last financial year, the funder settled a record $1.13bn of new loans. “[This is] a testimony to our capability as a lender and asset class expert in uncertain economic times,” he says. Funding has been used for a range of CRE projects recently that underscore the strong market demand. In July, Pallas 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,” says Lawrence.

Another recent project involved two loans to the Buildtec Group in Adelaide, with a third under consideration, taking total funding to about $70m 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.” A changing of the guard? The strong form displayed by Pallas comes at a time when the overall market is facing significant headwinds from possible long-term inflation and a corresponding increased reticence to lend as interest rates continue to rise. This is resulting in the role of non-banks becoming more important than previously. Pallas Capital estimates that non-bank lenders now account for 10% of the total Australian CRE loan book and believes the growth in non-bank lenders is driven by fundamental advantages, including speed and certainty of execution as well as commercial flexibility in formulating loan parameters. The shift in dynamics could be permanent, given market fundamentals. “We don't expect traditional banks to reclaim CRE loan market share that has been gained by non-bank lenders, but anticipate it's more likely to be reflected in a tighter lending market for CRE borrowers,” says Pallas chief investment officer Dan Gallen. One reason is that it’s more difficult to meet lending criteria at traditional financial institutions. “Interest cover ratios [ICRs] are also more demanding as lending rates increase, and the banks typically set ICRs approximately 50% higher than non-bank lenders,” says Gallen.

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“We can now offer our products to a wider audience of brokers”

“We don’t expect traditional banks to reclaim CRE loan market share that has been gained by non-bank lenders”

With funds looking for quality investments, non-bank CRE lender Pallas Capital is opening up to a wider broker base, thanks to a key collaboration

Source: Pallas Capital

Estimated non-bank share of CRE loans in Australia

Source: Reserve Bank of Australia Bank Lending Classified by Sector – D5 data, July 2022

January

1,018

February

+7.0%

Year-on-year growth

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Year-on-year growth in commercial lending, Jan–Jun 2022

“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.” Not all non-banks will be winners, however, with liquidity drying up in some areas as the fiscal spigots are tightened from the ultra-loose settings seen over the last few years. “For some non-banks it is … their access to funding sources that is becoming much harder,” says Lawrence.

1,089

1,017

1,098

1,032

1,118

1,028

1,129

1,027

1,142

1,039

1,161

+7.9%

+8.3%

+9.9%

+11.2%

+11.8%

2021

2022

March

April

May

June

1,200

1,150

1,100

1,050

1,000

With non-bank CRE lending rates continuing to increase, loan parameters tightening and some non-banks not able to tap the same funding as previously, Pallas Capital anticipates its PFT vehicle will continue its strong trajectory of growth. Pallas services SME borrowers in all key real estate asset classes, with a focus on metropolitan areas and major regional areas. It offers construction loans for a minimum of $2.5m, and a minimum of $1m for residual stock, pre-development, investment loans and vacant land loans for land capable of and intended to be developed within 18 months.

With funds looking for quality investments, non-bank CRE lender Pallas Capital is opening up to a wider broker base, thanks to a key collaboration

Steve Lawrence, Pallas Capital

10%

$bn