A savvy art of the deal in commercial property transactions
Buyers are often from Mars and sellers from Venus, so clear expectations are crucial
“Understanding the expectations of the likely buyer and ensuring the property is presented in line with these expectations is key to an expedient deal.”
The volume of commercial investment asset transactions for 2016 reached some €4.5 billion, comprising about 296 sales of more than €1 million. As investors look to navigate their way through 2017’s market uncertainties, controlling the controllables is key.
Agreeing a sale and then completing the transaction can be a lengthy process, and time creates risk for both parties. The drivers for both buyers and sellers in a transaction can change over time for any number of internal and external factors, including equity availability, taxation changes, fluctuation in currency and changes on the political landscape.
Vendors have expectations on how to present a property, which can be influenced by their own buying requirements. Buyers will have certain expectations about a property being sold, which will be linked to the profile of the current owner. It is important to understand both sides. Understanding the expectations of the likely buyer and ensuring the property is presented in line with these expectations is key to an expedient and successful deal.
The language of commercial property deals has no geographical jurisdiction, but the approach of buyers varies considerably. Knowing who the ultimate buyer is likely to be and ensuring the pre-sales preparation meets with their needs will maximise return.
Buyers in recent years have often had to take a pragmatic view on available information and the lack of warranties when buying assets from receivers. If the exit strategy is to target institutional investors and secure premium prices, then the property needs to be sold in institutional quality, with a full and comprehensive due diligence pack.
The vendor may assume the outstanding points individually may not be material to the value. However, collectively if these points are outstanding on a subsequent sale a buyer will query how easy they are to rectify if the current owner did not undertake them. Many minor issues can disproportionately delay transactions.
With strong competition for prime assets, buyers may still take a view on points, but there may be an impact on pricing and speed of the deal being completed. For assets with less competition, the level of pre-sale preparation needed depends on the targeted buyer.
On a commercial transaction at one end of the timeline spectrum, we see professional landlords selling a relatively recently traded asset, which has been well-managed, to professional buyers. In this scenario, both parties care about their reputation and appreciate that this gives them currency for future deals. The parties use professional advisers, with experience suited to the asset, who can meet the timelines. Everyone is invested in the deal happening in line with the heads of terms. This deal results in a satisfying conclusion with parties keen to do future business.
The opposite end of the spectrum involves the sale of an asset where there may be several unknowns. The buyer must have experience to understand the risks or have advisers who do. Neither party may intend to do future business together, so meeting deadlines is only done out of concern for an underbidder stepping in. The process becomes lengthy, with mismatched expectations and poor communication.
A substantial volume of deals sit somewhere in the middle of this spectrum, with both parties learning a lot about each other through the process.
Presenting and positioning the asset to suit the buyer needs to feed into the ownership business plan. On paper, letting up vacant space and undertaking all works needed makes good sense to try and add value. However, this needs to be done with a clear understanding of the buyer’s profile. If the buyer is someone looking to add value, then the asset needs to have appealing angles and opportunities.
With some 250 commercial deals in 2016, the length of the sale process varied from a month to a year, and many reputations were enhanced or damaged. With a great volume of trading expected, the transactional process should become more efficient.
With more certainty comes less risk, which will be reflected in the pricing. Buyers looking for assets with asset management angles and issues that offer value need to search harder to try and secure their returns. Vendors need to understand this demand and position their asset accordingly.
The Irish commercial property market is relatively small. In such a competitive environment, reputation is extremely important. Ensuring your reputation is protected and that each transaction enhances it is crucial. When buyers and sellers are able to understand and respect their differences, then deals have a chance to blossom.
Michele Jackson is a director of TWM Property Solutions.