Fortis presses ahead with property pile despite mounting debts and troubled markets

Pallas Group’s property development arm Fortis is pressing ahead with its buying spree despite mounting debts and a string of troubled projects.

Fortis development at 2 Bay Street picture Fortis May 15 2023

Boutique property player Pallas Group has continued its deal spree across new sites despite rising debt from a pandemic buy-up across Sydney, Melbourne and Brisbane.

Fortis, the development arm of Pallas Group, has weighed in with the purchase of a double block in Sydney’s well-heeled Rose Bay, with the $40m deal marking the latest move by the developer and lender into Sydney’s east.

Fortis is understood to be raising upwards of more than $100m for the site on a preferred equity deal, but the final settlement for the site remains months out with the council still to approve any development permit.

It follows the Australian Securities & Investments Commission’s decision to drop a probe into the lender and developer, citing its wholesale investor backing despite concerns within the regulator over the company’s conduct.

Pallas has made a name for itself from boutique redevelopments across Sydney and Melbourne, snapping up a growing list of sites across the country in a debt-funded splurge.

But with a rise in funding costs, Fortis is facing several projects where cap rates (the measure used in the property industry to determine the rate of return) have tumbled as interest rates have climbed.

The Australian understands Fortis is looking to shift several property plays.

On the block are Fortis’s sites on Alexandra Pde in Melbourne’s Clifton Hill, despite an unsuccessful campaign seeking to sell it for $50m.

Fortis was recently forced to take a haircut on the two properties on the old Fitzroy Gasworks site, trimming almost 2000sq m from the project.

The developer paid a combined $9.7m for the two sites on Alexandra Pde.

Despite publicly proclaiming plans to forge ahead with the project in 2020, little has moved at the Melbourne site.

Fortis is also understood to still be exploring options for its site at Guilfoyle Ave in Sydney’s Double Bay, next door to Pallas’s head ­office, after touting the site for $45m after buying it for $14m.

Property industry figures said Pallas pulled the site sale amid concerns over the valuations for Fortis’s broader Double Bay holdings, with the commercial property market struggling amid a tougher environment.

A spokeswoman for Pallas denied it was the owner of “any property assets”, noting its development arm Fortis was only a “development manager, that is, a consultant on a fee for service basis”.

“Both Pallas Capital and Fortis continue to be successful and profitable businesses,” she said.

“Fortis does not purchase or own properties or hold options on property and it is not a developer.”

Fortis’s city fringe office assets scattered across Sydney and Melbourne have struggled to attract tenants, and only at steeply discounted rates, with several sites purchased during the pandemic facing the greatest distress.

Fortis is pushing ahead with a 22,200sq m build at Wiltshire House, at the same time rival Tim Gurner has put several sites up for sale.

Fortis has assembled a huge book of potential projects in recent years, with the firm noting on its website it was sitting on almost $750m in finished residential and commercial projects, with a further “$560m to be completed by the end of the year”.

The developer assembles its sites through single purpose vehicles, backed by funds from Pallas Capital investors.

Pallas Capital is the group’s fundraising arm, taking cash from high-wealth investors offering double-digit returns on a string of projects or the potential to invest in a pool of cash to be used to lend to Fortis or other developers.

Pallas’s spokeswoman said Fortis was a business “providing development services to parties external to Pallas Group”.

However, many of these parties have been financed by lavish funding from Fortis, which sources indicated has consumed as much as 80 per cent of Pallas’s overall funding balance at points.

But much of this was recently reduced after Fortis secured several major refinancing deals with other lenders including ANZ, Dexus, TTG, LSH, PAG, Eildon Capital, Keystone Capital, Macquarie Bank and St George Bank.

“While active in the development management market, it is subject to confidentially provisions and it generally does not disclose details of its active projects,” the spokeswoman said.

Sources said while Pallas ­applied stringent lending controls to loans extended to competitors, the funding house may not take the same approach to Fortis.

A Pallas spokeswoman said Fortis had not faced a cash call as “it doesn’t own property”.