Pallas Group seeks $5m cash injection for loan on Melbourne HQ

Sydney property player Pallas Group is chasing investors for a $5m cash injection on its Melbourne headquarters just months out from the maturity of the debt facility on the site.

Pallas Group's development at 67 Palmerston Crescent, South Melbourne.

Property player Pallas Group is tapping investors for a $5m cash injection on its Melbourne headquarters, in a bid to extract money from the city fringe property as the lender-developer’s big build plan for Sydney’s Double Bay collapses.

Pallas Capital, the funds arm of the Double Bay-based lender, has touted a $5m first mortgage investment loan to investors in recent days, offering the chance to slot into the debt on the group’s tower at 67 Palmerston Crescent, South Melbourne, on the fringe of the central business district.

Pallas is offering the loan on the project, which company figures insist represents normal business practice to reduce exposure to the completed build, just two months out from the maturity of the facility set for June this year.

But industry sources noted Pallas is only seeking to reduce its debt exposure, rather than sell down the equity in the building or sell the building entirely and it comes as the group continues its breakneck expansion.

Pallas has been a major player in the luxury property market in recent years, snapping up sites in Sydney, Melbourne, and Brisbane driven by the success of its big builds and double-digit returns to investors.

But the group has also faced regulatory attention, with the Australian Securities and Investments Commission probing the company over concerns around misstatements to investors before dropping its investigation.

The developer picked up the South Melbourne site in an $8.6m deal in 2019, just two months after the block was sold for $6.8m, before raising millions to fund its rebuild.

The build wrapped up at the end of 2022 leaving Pallas holding almost 2800 sq m of commercial space across eight levels. The $24.05m total loan facility tied to the site, Pallas’ first investment loan, reaches maturity in June. Pallas is advertising its efforts to swap out almost $5m from the first mortgage on the South Melbourne site, which it noted is geared at 65 per cent “on an ‘as is’ gross realisable value”.

But Pallas is still paying the cost of the loan on the building, with loans on the site yielding almost 11.3 per cent, plus occupying a full floor at the office which houses its Melbourne HQ

An artist’s impression of Pallas House, Double Bay.

A Pallas spokeswoman confirmed the investment loan was fully drawn down on August 30 last year. “There have not been any further advances under that loan and there is no current refinancing activity in relation to the loan,” she said.

Two floors at Palmerston Crescent are up for lease, with Colliers spruiking the combined 763 sq m of floor space since September last year.

Industry figures said the debt on the building was likely chewing through its rental yield, averaging circa 4 per cent, well below the servicing costs of its debt.

Pallas had high hopes for its Palmerston site, with internal valuations hovering around $38m to $40m, but the office market remains subdued as interest rates rise and a continued work-from-home trend is hurting rentals.

The group had also intended to sell the site, exploring plans to put it on market, but after spending $8.6m on the block and raising a $24m loan facility, plus interest costs on the site, Pallas is likely facing a haircut on any sale.

Palmerston Crescent is among a number of sites Pallas holds in the area, alongside its $10m block at Moray Street, South Melbourne, a $6.9m site at Thomson Street, and a $12m site on Eastern Road.

Pallas has previously sought to characterise the group as a collection of projects, with the potential for failures in one development being unlikely to cause problems within the broader company.

A spokeswoman previously said Pallas “doesn’t own any property assets”, noting its development arm Fortis was only a “development manager, i.e. a consultant on a fee for service basis”.

“Fortis does not purchase or own properties or hold options on property and it is not a developer. Its business is providing development services to parties external to Pallas Group,” she said.

“As Fortis doesn’t own property, it doesn’t require funding.”

However, it faces the potential for problems to spread after lavishing guarantees across its sprawling list of projects tied to the family trusts of Pallas directors Dan Gallen, Patrick Keenan and Charles Mellick.

The group is juggling a bulging list of projects, with a recent $40m foray into Sydney’s Rose Bay after Mr Mellick snapped up a 2000 sq m block on Ian Street. Investors were tapped for more than $100m to fund the project.

Pallas has been a major player in Sydney’s luxury market, snapping up a site in Elizabeth Bay with rumours now swirling the company could be behind a $75m purchase of a block in Woollahra.

But a plan to rebuild the Woollahra car park, in Sydney’s Double Bay, is unlikely to proceed after the Lowy family’s development arm, Assembly Funds Management and Pallas pulled out of a proposed redevelopment of the Cross Street site.

Originally published as Pallas Group seeks $5m cash injection for loan on Melbourne HQ