Lending strong to high-end commercial property projects

Pallas Group is the parent company of real estate financier and investment manager Pallas
Capital and property developer Fortis, which develops luxury commercial and mixed-use projects nationally.

Fortis director Charles Mellick said that although the commercial real estate finance market was more demanding, “these recent facilities from ANZ, St George and Macquarie Bank demonstrate that the major banks are still looking to lend and to take a commercial approach, displaying a strong preference for premium assets and experienced borrowers”.

The first of these is a term debt facility of $25 million from Macquarie Bank, supporting the completed retail and commercial building at 2 Guilfoyle Avenue, Double Bay. This building benefits from long-term tenancies with Baker Bleu on the ground floor and fund manager TDM Growth Partners in three commercial levels above. The property was last valued at $42 million.

Centuria Bass joint chief executive Giles Borten said there is space for both the traditional banks and non-bank lending, but the criteria is the same for both when signing off on a loan.

“For Centuria Bass, borrowers are typically developers or asset owners with a short-term strategy ie either leasing up the asset or divesting it in a short period,” Borten said.

“These are real estate loans across various sectors including residential developments, commercial and industrial properties, hotels and hospitality outlets, and healthcare.”

“Generally, we will consider loans across all sectors and assess the merits of the individual borrower and transaction. Each loan will be set up with a structure and terms that suit the risk profile of the loan.”

But Borten adds that flexibility on structure and terms and the ability to price-risk gives non-bank finance a key edge over the traditional bank market and will ensure its continued growth, particularly in more volatile markets.

For Fortis, Mellick said the three construction loans represented conservative loan to value ratios of about 50 per cent, whereas the major banks would probably have loaned about 60 per cent to 65 per cent of end net value in early 2022.

“Accordingly, each project is more equity intensive than it would have been in that environment,” he said.

Mellick said in the past the major banks would have required that the net value of off-the-plan sales represented 80 per cent to 100 per cent of the construction loan limits, “so in this respect they will show commercial flexibility for the right project if the developer has a strong track record”.

On the loan for the 2 Guilfoyle Avenue, Mellick said Macquarie Bank saw significant value in the strength of the lease covenants in this building and were able to lend at an interest rate cover that reflected this.

“Although we were still required to make a substantial equity injection, we appreciated the commercial attitude taken by the bank,” he said.

The second facility for Fortis was a $52.4 million construction loan from St George for the completion of the premium retail and residential project MONA in Darling Point. This development comprises about 500 square metres of ground floor retail and 24 apartments and has a total projected value of about $103 million on completion.

With eight apartments pre-sold, including the penthouse sold at a record $13.75 million, the new construction loan is 60 per cent covered. Construction on MONA is expected to be completed in late 2024.

The third facility for Fortis was a $64.3 million construction loan from ANZ for the completion of the residential project Piper in Point Piper opposite Cranbrook School. This development comprises 14 apartments, designed by Luigi Roselli, and has a total projected value of about $139 million on completion.

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With six apartments pre-sold, this construction loan is about 55 per cent covered. Construction on Piper is expected to be completed by late 2024.

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