It is the question that keeps all investors up at night: is it the right time to sell my asset? But what factors are at play when deciding whether to divest something from your portfolio, or to reposition it instead? The major financial implications are threefold: yield, tax and reinvestment.
A favorable yield on an asset is important, but so is the ability to reinvest the proceeds from selling – making it a less straightforward choice. Cristina Garcia-Peri, head of corporate development and strategy at Madrid-based manager Azora Capital, says: “Yield is always an important factor, and as market uncertainty grows and investors become more risk averse, they increasingly want most of their target return to come from yield. Yield is king and, in times like the ones we are living in now, you should not give it up easily.”
The jurisdiction, and therefore the tax implications, also play a part in deciding what to do with an asset. Is the tax code likely to change with a new administration? Are there advantages to selling now?
For Azora, the final decision about an asset only comes after thorough analysis of these questions. “If we believe we can reinvest the capital today at better risk-adjusted returns, we will start a process of analyzing those alternative investments in depth,” she says.
But even after these calculations, the firm may decide that working the asset harder is the best option. “In parallel and prior to any divestment decision, we will look deeper into the existing asset and try to find levers to continue generating additional return,” she says.
Choosing to improve an asset, or reposition it entirely, may be advantageous if the market conditions do not favor selling and reinvesting the money. But there are circumstances where selling an asset might just be the least disruptive option, says Troy Javaher, head of UK and Europe at Dallas-based investment firm Lincoln Property Company.
“While the regeneration theme is undoubtably a necessary and positive story which almost everyone can support, applying that transformative change across a vast amount of the built environment in the near term simply strains reality,” he says. “The challenges and constraints – which range from physical, timing, political, permitting, communal and economic – must be honestly recognized and confronted.”
“Yield is king and, in times like the ones we are living in now, you should not give it up easily”
In terms of non-financial implications, managers need to consider their own holding period, which may force them to divest in order to repay investors, and the wider market conditions. But perhaps the most important factor is the manager’s own goals.
For value-add investors, improvements to a property are made up-front, and therefore the opportunities to add further value often diminish over time. For core investors, the opposite may be true. Zac Goodman, chief executive of London-based TSP, says: “The decisions to sell are so multifaceted and contextual. Sometimes when you’re successful with something and you or your investors feel that you’re at a point in the market where you will get a premium for it, then you have to sell.”
TSP’s aim is to hold its assets, and later this year the firm is launching a new platform to enable it to transfer assets into a new longer-term hold company, where existing investors can choose to come with them, or the manager will refinance the asset from elsewhere. “If I had it my own way, I’d never sell anything,” Goodman says.