An “off-market” transaction is the acquisition or sale of real estate which is not conducted through a formal public sale process. A purchaser will not have entered into a “bidding war” and, therefore, may feel a fairer price was agreed as there will be no upward price pressure from competitors. A potential purchaser may be prepared to agree a price that represents a premium to secure exclusivity and control over the sale process without entering into the riskier bidding process for on-market transactions. An off-market transaction can present the purchaser with an opportunity to find greater value through greater control of the acquisition process.
Power and control
During the off-market sale process, the purchaser may be able to wrestle power from the seller and look to agree a price reduction where the due diligence uncovers any issues with the property or its title. The seller can then be incentivised to reduce the price to avoid the buyer pulling out of the transaction as if news of an aborted sale is leaked, the seller risks the property being perceived as flawed and devalued on the open market.
As technology plays a more significant role in the provision of due diligence and property information, the time for completion of an off-market transaction can be considerably reduced when compared with the sale of an asset on-market, lowering acquisition costs for the purchaser. This is a significant advantage in the modern market where there is often pressure to complete a number of transactions each year.
However, while the seller and its advisers will research the market to agree a price for the sale of the property, without a competitive process, there is no certainty as to whether the seller is obtaining the highest possible price. Conversely, a borrower may not know if it is over-paying for an asset with no other parties competing.
Where a seller has a fiduciary obligation (such as fund managers) or owes a duty of care to certain investors or partners, it is under an obligation to obtain the highest sale price for the sale of the asset. In these situations, the option to agree an off-market transaction may not be possible unless the seller has been approached by a potential buyer that is very committed to purchasing the asset and therefore offers a price that significantly exceeds the anticipated sale value.
Where a deal has been agreed off-market, the parties may be more able to control any publicity throughout the process and agree the relevant press announcements between themselves. This will assist a purchaser where they may be involved in a number of simultaneous transactions and they wish to keep knowledge of their prospective purchases away from their counterparties on other transactions, as well as minimising the risk of a competing bid being lodged.
The appetite for off-market
Competition for the prime development sites and key investment areas in the UK, as well as the resurgent Dublin real estate market, remains fierce. Property companies and investors are competing for a limited number of assets, and with the continued record low levels of interest rates, the appetite to sell in these markets remains low as the ability of sellers to reinvest the sale proceeds in other assets is limited by inflated prices. This search for yield is one of the drivers behind the uptick in investor interest in real estate assets in southern and central Europe.
While most property acquisitions do involve a more traditional public process, there are still a number of off-market transactions being completed, and buyers tend to be proud of completing transactions off-market. It is typical that where specific assets are targeted, there may be perceived significant value in agreeing off-market transactions. An example is Tritax Big Box REIT’s strategy to acquire a portfolio of megasheds and warehouses, where it worked with targeted sellers and developers to obtain maximum value and maintain yields through off-market transactions.
The increased use of technology and “internet intermediaries” is also enabling an increased number of potential purchasers to obtain information about assets for sale which have not been officially listed through an agent.
While it currently remains more commonplace to broker deals through market connections, it may become more prevalent that purchasers and sellers are connected via such intermediaries. Agents and brokers won’t be out of jobs quite yet, although it is perhaps a trend to keep an eye on in the years to come.
On or off?
In the UK real estate market, the level of competition and appetite for purchasing and trading property assets is likely to mean that the agreed purchase price is at least at “market value”. In the current market, there is typically a premium that is apportioned to the buyer receiving exclusivity.
Lenders are unlikely to have any issues with off-market transactions where true value can be ascertained, and they will insist that any confidentiality agreements with the seller will not prejudice the lender’s ability to undertake the required due diligence.
Ultimately, each transaction is different. There will be a number of advantages and disadvantages to selling assets on- and off-market and there is no set formula for which method will provide the best result for the parties.
Whether a sale is undertaken privately or in a competitive sales process will be in the hands of the seller and depend on the balance between confidentiality and obtaining the highest possible sale price for the asset.
Francisca Sepúlveda is a partner and Ben Wulwik is an associate at Reed Smith
