Capital Property Funds in talks over Pirie St office tower settlement

A legal battle over a failed $58.6m deal to acquire an office tower in Adelaide could force Capital Property Funds (CPF) to wind up one of its flagship investment funds, but the fund manager says it’s “reasonably possible” a settlement with the vendor will salvage the deal.Building owner the Raptis family is offering to lend CPF $20m in order to finalise the transaction, which collapsed in February 2023 when CPF failed to settle on the deal after failing to raise the investor funds needed to finance the purchase.

That prompted Raptis Properties to launch legal proceedings in South Australia’s Supreme Court last March, 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.

The property – at 63 Pirie St in Adelaide’s CBD – had been earmarked for CPF’s Diversified Property Fund, which comprises one other asset – a $53m office building on Coronation Drive on Brisbane’s western fringe.

63 Pirie St, Adelaide. Supplied by Cushman & Wakefield

As part of a settlement proposal before the NSW Supreme Court, Raptis would provide $20m in vendor finance, and CPF would go back to investors to raise at least $15m in equity while also arranging debt finance secured over the Brisbane property.

CPF executive director Joe Christie said he was hopeful the settlement proposal was close to being finalised and was confident of raising the capital needed to fund the purchase.

“I think everyone probably now agrees that the inflation/interest rate cycle is at or near its peak, so I think sentiment is turning,” he said.

“We’ve got a very close relationship with our investors, and they can see that 63 Pirie St is a very good asset available for purchase at below replacement cost, which provides an irreplaceable economic advantage when compared to newly built commercial office buildings.

“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.

“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 CPF fund’s trustee – One Managed Investment Funds – is seeking judicial advice on the proposed settlement, with a directions hearing set down for April 8.

If the deal is endorsed by the court, settlement is expected to be completed by June 30.

In the fund’s half-year report, the trustee says the proposed settlement “aims to maximise the potential return to investors”, but warned its failure could force the fund into a fire sale of its Brisbane property.

“As at the date of these financial statements, the directors consider a negotiated settlement is reasonably possible,” the report says.

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

“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 or may require the fund to borrow an additional sum of money to help fund the payment of damages.

“As a result, the directors are of the view that there is a material uncertainty related to above conditions that may cast significant doubt on the fund’s ability to continue as a going concern.”

The financial statements show that the fund made a net loss of $2.4m in the six months to December, driven by $3.3m in default interest on the unpaid purchase price for the Adelaide tower.

The fund has so far set aside $5.6m in default interest that could be charged if negotiations with Raptis over the proposed settlement fall through.

Distributions from the fund were withheld in September and December pending the outcome of the matter.

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, while close to a third of the space is currently vacant.

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