Why you need an exit strategy for your Sydney City Fringe commercial property

Investing in commercial real estate can be lucrative, offering the potential for substantial financial gains. However, like any investment, it’s vital to have a well-defined exit strategy in place before you even purchase a property. An exit strategy is simply a plan for how you will eventually dispose of your investment. Having a clear exit strategy is essential for several reasons:

• Maximising returns: A well-planned exit strategy allows you to sell or dispose of your property at the optimal time, maximising your profit potential. Market conditions, interest rates, and property appreciation all play a role in determining the best time to exit.
• Mitigating risks: Unexpected events such as economic downturns, changes in local regulations, or personal financial difficulties may necessitate a quick sale. An exit strategy helps you navigate such situations with minimal losses.
• Achieving investment goals: Your exit strategy should align with your overall investment objectives. Whether your goal is to generate a lump sum for retirement or reinvest profits into another property, a clear exit strategy helps you stay on track.
• Attracting investors: If you require external financing, having a well-defined exit strategy can instil confidence in potential investors or lenders. It demonstrates that you have a thorough understanding of the investment and a plan for the future.

Whether you’re an investor or you’ve inherited commercial property, you want to get advice on your options. You might choose to hold the property if it’s tenanted and enjoy a steady income. However, if several people own the property and not everyone agrees on what to do, it’s usually more efficient to sell.

Selling a commercial property requires its own strategy: older buildings might need minor repairs or some renovation, the property might be in an area that has been rezoned and therefore have more potential, you might achieve a higher sale price if you can repurpose the property to appeal to more buyers. We might market the property as having development potential, even getting DA approvals, so it appeals to developers or visionary commercial property investors.

Importantly, you (and we) need to decide on the most effective sale method ‒ usually auction but occasionally by private treaty or with an off-market sale.

Common exit strategies for commercial property

There are several common exit strategies for commercial property investors, each with advantages and disadvantages:

1. Outright sale: This is the most common exit strategy, involving selling the property to another investor or owner-occupier. The success of this strategy depends heavily on market conditions and the property’s condition.

2. Sale-leaseback: In this arrangement, you sell the property to an investor but immediately lease it back. This strategy is aimed at business owners who want to focus on their core business and no longer want to manage property. This allows you to free up capital while retaining the use of the property. However, you become a tenant and lose ownership.

3. Refinance: You can refinance your existing mortgage to access equity for other investments or personal use. This allows you to retain ownership but increases your debt level.

4. Develop and sell: If your property has development potential, you can add value by improving or expanding the existing structure. This can significantly increase the property’s value and attract a higher sale price.

5. Development approval and sale: You might also engage an architect, a town planner and an accredited certifier, among others, to get development approval. Selling a property with development approval can help owners achieve a higher sale price.

6. Partial sale: You can sell a portion of your property or ownership shares to another investor. This allows you to access capital while retaining some control over the property.

7. Gifting or Inheritance: Transferring property ownership to family members or a charitable organisation can be an exit strategy for estate-planning purposes.

What you need to take into account when choosing an exit strategy

Deciding on an exit strategy isn’t a simple process. There are several factors to consider.

Investment goals: Your exit strategy should align with your overall investment objectives.
Market conditions: Current and projected market conditions will significantly affect the success of your exit strategy.
Property condition: Your property’s physical condition and occupancy rate will affect its marketability.
Financial situation: Your personal financial situation and debt levels will influence your options.
Holding period: Your intended holding period will affect the feasibility of certain exit strategies.
Tax implications: Understand the tax implications of each exit strategy to minimise your tax liability.

The bottom line for commercial property exit strategies

A well-defined exit strategy is crucial for successful commercial property investment. It allows you to maximise returns, mitigate risks and achieve your investment goals. By carefully considering your options and consulting with professionals, you can develop an exit strategy that suits your needs and circumstances.

Important: You should talk to your accountant or financial adviser as part of the decision making process

Case study: Recently, we helped two brothers with some commercial properties they’d inherited. Their father owned and ran a business, worked hard, and built up a portfolio of assets, including two shop tops in Petersham. The brothers chose to liquidate the assets to pursue their own financial strategies.

We decided to take both properties to auction while the commercial property market sentiment was buoyant. One shop top sold before auction day and the other just after auction, both for well above recent valuations.

Let us help you with your commercial property.

As dedicated local commercial real estate agents, we can help you extract more value from your commercial property. Please get in touch to discuss your circumstances and assets so that we can give you personalised advice. Whether it’s commercial leasing, management or sales, we’re here to help you with your Sydney-based commercial property.

Contact us at Ray White Commercial Sydney City Fringe