Arbitrage opportunities in commercial property - Cromwell Funds Management
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November 16, 2022

Arbitrage opportunities in commercial property

Stuart Cartledge



Meet Gerald.

Gerald doesn’t sleep well because he’s always alert to market opportunities. He’s willing to transact in the middle of the night, seeking out small gains, sometimes with little risk. While he doesn’t sleep well, he sure has the money to eat well.


We didn’t catch this guy’s name.

He appears to be less flexible and prefers to follow a ‘steady-as-she-goes’ approach to investing. He sleeps really well, but because he doesn’t benefit from some of the opportunities that Gerald identifies, he has less money and doesn’t eat as well.


Which type of investor are you?

Investing in commercial property or infrastructure assets is a long-term game, and there’s no single strategy that always wins. However, at times, market distortions create opportunities for those with a little flexibility in their investing tool kit.

Following the sell-off in listed property securities since the beginning of 2022 (largely in response to rising interest rates), listed property provides investors with an exposure to commercial property at a substantial discount to very similar exposures in less liquid alternatives.

As Gerald identified, if you’re allocating capital to property, this current opportunity must surely be worth considering.

Like most market dislocations, these opportunities arise because different investors are driving different markets, and it takes time for arbitrages to close.

The following are some examples of investments that the Cromwell Phoenix Property Securities Fund has benefitted from in the past and some lessons to learn.

Sydney Airport – lower risk as an unlisted asset?


We recently wrote about the long journey that Phoenix’s clients enjoyed as shareholders of listed infrastructure stock, Sydney Airport, which delivered an annualised return from IPO to takeover of approximately 18% p.a.


This outcome was of course enhanced by a ‘take private’ transaction that sees the asset now held by a consortium of investors including some of the biggest industry funds. So how can unlisted investors pay more for an asset that has been listed for 20 years and had its value compound so strongly for so long?

One of the key attributes that Sydney Airport now possesses that it didn’t before, is that it’s no longer a volatile asset.

Incredible, isn’t it?!


The return profile, generated from aeronautical activities, retail and car parking will be the same. The entity will be subject to the same capital market conditions, particularly rising interest costs as its debt matures, and the impact of exogenous shocks such as pandemics and wars. However, instead of being revalued daily by global markets, the value of the entity will now be assessed by a team of ‘experts’, on a far less frequent basis, most likely quarterly. Thankfully, these experts don’t have to invest their own money at their own valuations.


An asset that is only revalued occasionally looks like its risk, or volatility, is low when compared to exactly the same asset that’s being valued daily by the share market. As a result of ‘apparent’ low risk, unlisted funds can (perhaps legitimately) pay more for these assets.

GPT Group – similar assets, different pricing

The same holds in listed property securities. While we’re happy to acknowledge listed markets are sometimes just volatile for the sake of being volatile (and that does keep some of us awake at night) they must also be respected for attempting to factor in new information as efficiently as possible.

In August 2021, Australian 10-year Government Bonds were trading on a yield to maturity of around 1%. Today, they are well over 3%. The value of almost any asset is impacted by this.

The listed property market has reacted, and investors can now buy a stock, such as GPT Group (ASX:GPT), for a material discount to its underlying asset backing. At the same time, GPT manages two unlisted wholesale funds, which in some cases hold assets in common with GPT’s own balance sheet. These wholesale unlisted funds are valued at book. They too have an apparent risk that is lower than GPT, but do they really?


Redcape Hotel Group – beer does help you sleep

Redcape Hotel Group was a listed owner and operator of pubs in NSW and QLD. However, after less than two years as a listed entity, the responsible entity determined that the listed market wasn’t properly valuing the stock, so a complicated proposal to delist was announced.

Phoenix took advantage of the transaction, to buy into the listed stock, and to ultimately sell the unlisted stock, locking in a listed versus unlisted arbitrage along the way. Our Redcape position rallied almost 40% in the first six months of 2022. Over the same period, the listed property sector fell by 23%.

We fully accept that markets, stocks and portfolio construction are complex matters. However, at times, there are low risk opportunities to take advantage of market dislocations. Listed volatility might keep us awake at night, but those investors who don’t bury their head in the sand and make decisions based on a clear understanding of exactly what they’re investing in, are likely to prosper.

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