Pallas Group offloads $20m stake in Melbourne site amid a gloomy market for fringe offices

Sydney property player the Pallas Group has taken $20m in preferred equity on a Melbourne suburban site after failing to sell the project.

An artist’s impression of the original Clifton Hill project.

Sydney property players Pallas Group has offloaded a $20m preferred equity stake in its long-delayed $305m Clifton Hill Foundry project in Melbourne after failing to sell or split the site.

The Double Bay-based lending and development players confirmed it had placed the $20m preferred equity deal, handing investors the position on the mixed office and commercial project which was due for completion in about March 2027.

Pallas Capital, the funding arm of the mixed business, said that the project, first mooted in 2021, faced significant uncertainties as a builder had not yet been appointed for the project during a time of difficulty in the fringe office market.

In a memorandum to investors, Pallas said its construction arm, Fortis, would deliver a profit of about $49m on the project.

Preferred equity acts as another form of debt on a project, offering the first share of any upside as well as protection from losses which are first slated to common equity holders before hitting preferred equity holders.

Pallas said the cash raised from the $20m preferred equity issue would be used to repay about $7.3m in loan notes outstanding on the site.

These are in addition to a further $27.3m in short-term loans and equity provided by Pallas and $15.7m on a first mortgage.

In total almost $50.3m has already been spent on the site.

Fortis has attempted to sell the site, which it bough in 2021, and advertised the collection of buildings last year for about $40m.

However, Fortis was unable to find any buyers for the block, which sits across the road from the heavily polluted former Melbourne gas works remediation site in the inner city suburb of Clifton Hill.

Fortis purchased the site and several other adjacent properties for a combined $33.7m, with a further $1.75m due to be outlaid for a laneway that will be subsumed in the project.

Despite purchasing the site three years before, Pallas told investors that Fortis would charge them a 3.5 per cent acquisition fee for the property, plus a further 3 per cent arrangement fee for the project.

Pallas Group executive chairman Patrick Keenan.

As a result, Pallas will book a combined $5.4m upfront in fees.

The sum will be in addition to an ongoing $150,000 management per month for the life of the project, plus an additional $5m in fees for obtaining an approved planning permit and a further $5m when construction kicks off.

Pallas will pay itself a further 30 per cent of the project profit over a hurdle rate of 10 per cent per annum.

Pallas Group executive chairman Patrick Keenan said all fees on the Clifton Hill project “are fully disclosed in the relevant information memorandum”.

“Many Pallas Capital investors actively prefer projects managed by Fortis because Fortis has a perfect record of high-quality delivery of development projects,” he said.

“The preference equity in this project has been fully subscribed.”

Fortis plans to build a Woolworths supermarket on the site, alongside two towers featuring retail and strata commercial office spaces.

However, the proposal comes as Fortis has put on hold plans to start another project in Cremorne, in inner-city Melbourne.

Fortis recently leased its other Cremorne site to fashion and footwear giant Adidas, however the broader city-fringe commercial office market is challenging.

Fortis bought a number of city-fringe sites in a play for the office market, including a $65m South Melbourne site on Kings Way and a $50m seven-storey tower in Moray Street.

Pallas previously told The Australian that the group “doesn’t own any property assets”, and that Fortis was “a development manager, ie 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,” a spokeswoman said.

“Its business is providing development services to parties external to Pallas Group.

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

Originally published as Pallas Group offloads $20m stake in Melbourne site amid a gloomy market for fringe offices