Capital Property Funds fails to salvage $58.6m Adelaide office buy

A last ditch bid to salvage a $58.6m office tower deal in Adelaide has been rejected, setting up a court battle between its vendor and a Sydney fund manager.

The office building at 63 Pirie St, Adelaide.

A last ditch bid to salvage a $58.6m office tower deal in Adelaide has been rejected, setting up a court battle that could force Capital Property Funds to offload another tower in Brisbane and wind up one of its flagship investment funds.

Vendors of the Pirie St tower in Adelaide’s CBD, the Raptis family, had offered to lend CPF $20m as part of a deferred settlement arrangement designed to finalise the sale, which fell through in February 2023 when the fund manager failed to settle due to a shortfall in funds raised from investors.

However after seeking judicial advice, the CPF fund’s trustee, One Managed Investment Funds, concluded the agreement “was unlikely to be in the best interests of members”.

That led the Raptis family to rescind the contract and carry on with the legal proceedings it first launched in South Australia’s Supreme Court in March 2023.

“Subject to obtaining judicial advice, the Responsible Entity (One Managed Investment Funds) is preparing to defend those proceedings as well as instituting cross claims it considers arise in the circumstances,” the trustee said in the latest quarterly update to investors.

“The Responsible Entity appreciates that this may be a disappointing outcome for investors however the decision was taken after careful consideration of the prevailing circumstances.”

In the fund’s latest annual report, its directors warned the litigation was expected to be “complex and lengthy”.

“The ability of the fund to continue as a going concern depends on resolving the litigation in a manner that does not exceed a prudent level of the fund’s financial resources or borrowing capacity,” they said.

“The responsible entity may be required to reach a formal settlement with the vendor, or (assuming the proceedings are determined against the fund) be ordered by the court to pay damages to the vendor.

“Either outcome could result in the fund being forced to sell the 601 Coronation Drive property to fund this payment and thereafter being required to terminate and wind up the fund.”

The Adelaide building – at 63 Pirie St – had been earmarked for CPF’s Diversified Property Fund, which comprises one other asset – an office building on Coronation Drive on Brisbane’s western fringe.

That property was recently revalued to $46.5m, down from $53m, as part of a refinancing arrangement with the fund’s lender ING Bank. The revaluation left the fund in breach of a financial covenant that required it to maintain a loan-to-value ratio of less than 55 per cent.

However the lender has offered to extend its funding for another year on the condition the fund makes a series of payments to reduce its LVR exposure.

Distributions from the fund have been suspended pending an outcome in the matter.

The fund’s latest annual report shows that it made a $14.3m loss in the year to June, due to the Brisbane property write-down, and $6.6m in additional provisions set aside for default interest it may be required to pay as part of the legal dispute surrounding the failed Pirie St contract.

The fund has so far set aside $8.9m in default interest.

Raptis Properties is claiming a breach of contract and seeking orders that CPF either pay the full purchase price plus costs, or pay costs including interest, holding costs, costs incurred by a new sales process and damages for breach of contract.

Raptis Properties is an entity associated with the South Australian-based Raptis family who made their fortune in the fishing industry. It is not associated with the ASX-listed Raptis Group. The Raptis family has owned the Pirie St property for more than 20 years.

The building is currently home to tenants including Lockheed Martin, Macquarie Group, Cowell Clarke and Bentleys.

CPF had been planning a refurbishment of the property in a bid to lease up vacant space.

“Many pundits are now calling the bottom of the market for commercial office and are predicting that if you are not set within the next six months you may miss the boat,” CPF executive director Joe Christie said in March.

“This means that the clock is ticking on getting set in commercial office and it’s a great opportunity to get set in a high quality office asset. We think 63 Pirie St is the best value B-grade office building in Adelaide.”

The matter before the Supreme Court in Adelaide is set for a hearing on November 8. A defence has yet to be filed with the court. Mr Christie declined to comment. One Managed Investment Funds did not return calls.

Originally published as Capital Property Funds fails to salvage $58.6m Adelaide office buy