For property developers, the exit strategy can have a significant impact on the overall profitability of a project. The highest sale price does not necessarily produce the best return once finance, tax, transaction costs, timing and risk are taken into account.
Whether you plan to sell completed units, dispose of a development site, sell the company holding the property or retain the finished development as an investment, decisions made early in the project can affect your eventual return.
Why should property developers plan their exit strategy early?
A development appraisal will typically focus on acquisition costs, construction expenditure, funding and anticipated sale value. However, the way that value is ultimately realised can be just as important.
Ideally, an exit strategy should be considered before acquiring the site. This gives you time to assess the likely purchaser, whether the intention is to develop and sell or develop and retain, and whether the proposed ownership and funding structure supports the intended exit.
Your preferred exit may change as the development progresses. Construction costs, interest rates, market demand and property values can all move significantly during a project. Regularly reviewing the exit allows you to respond to these changes rather than being forced into a decision when the development is complete.
Key considerations include:
- Your likely purchaser and preferred exit route
- The cost of holding the development for a further 6–12 months
- Funding, tax and transaction costs
- Changes in market demand and property values
- Whether an earlier or partial exit could reduce risk
What are the main property development exit strategies?
There is no single approach that will suit every development. Common options include:
Selling completed units: Selling properties individually can potentially maximise overall sales value, but may take longer and create additional finance, marketing and holding costs.
Bulk sale: Selling several units to one purchaser can provide greater certainty and a quicker return of capital, although a discount may be required compared with individual sales.
Selling before completion: Disposing of the site or development before construction is complete can reduce exposure to further construction and market risk and release capital sooner.
Forward sale or forward funding: Agreeing sale or funding arrangements before completion can provide greater certainty over the exit, although the contractual and tax implications need careful consideration.
Selling the development company: Selling the shares in the company holding the development can have different commercial and tax consequences from an asset sale. The purchaser acquires the company itself, including its assets, liabilities and historic position.
Part-sale, part-retain or refinance: Selling some units while retaining others, or refinancing a completed development and retaining it as an investment, can allow developers to release capital while maintaining exposure to future rental income.
The right route depends on your objectives, the development, funding position and prevailing market conditions. For SMEs, the ability to release capital and preserve borrowing capacity for the next project may also be an important consideration.
When should a developer exit?
Timing an exit is not simply about waiting until property prices are at their highest.
A higher eventual sale price may not result in a better return if the property has to be held for another year, generating further interest, insurance, maintenance and management costs.
Developers should therefore look at the net return, rather than just the headline sale price.
Consider:
- How much will it cost to hold the property for another six or twelve months?
- Are financing costs likely to increase?
- Is demand strengthening or weakening?
- Would completing additional works materially increase the property’s value?
- Could some units be sold while others are retained?
- Could an earlier exit reduce exposure to market or construction risk?
A good strategy should also include contingency plans if sales slow, costs increase or market conditions change.
Does the ownership structure support the intended exit?
The structure used to acquire and develop a property can have significant implications for the eventual exit.
Many developers use a special purpose vehicle (SPV) for individual projects. This can provide a clear structure for funding, investment and project management and may facilitate a future disposal through a sale of the SPV’s shares.
However, there can be important differences between selling the property itself and selling the shares in the company that owns it.
A purchaser acquiring the shares acquires the company together with its assets, existing liabilities and contractual and regulatory history. This can result in detailed due diligence and requests for appropriate warranties, indemnities and other contractual protections.
An asset sale, by contrast, allows the parties to identify the particular assets and liabilities being transferred, although it may require the transfer or novation of contracts and other rights and can have different tax and transaction cost consequences.
The key point is that the anticipated exit should not be treated as an administrative decision to be made after the development has started. The proposed exit should form part of the original structuring and planning of the development.
What are the tax implications of a property development exit?
Tax should be considered alongside the commercial exit strategy, not after a sale has already been agreed.
Where property is acquired or developed as part of a trade with the intention of selling for a profit, the resulting profits will generally be treated as trading profits rather than capital gains. For companies, this will generally mean Corporation Tax applies, although the precise treatment depends on the facts and circumstances.
The distinction between property held as part of a development trade and property held as an investment is therefore important, as the tax treatment on exit can differ significantly.
Residential developers should also consider whether Residential Property Developer Tax (RPDT) applies. Where the relevant conditions are met, RPDT is charged on certain profits from UK residential property development in addition to Corporation Tax. It is targeted at the largest residential property developers and applies to relevant profits above the applicable annual allowance. The allowance is shared across groups.
The tax outcome can also differ depending on whether the exit is structured as an asset sale, share sale or another form of transaction. VAT, SDLT and other transaction taxes will also need to be considered, depending on the nature and location of the property and the structure of the transaction.
Developers should obtain specific tax advice before committing to a particular acquisition, development or exit structure.
Build your exit strategy into the development plan
The most successful exit strategy is rarely created when the development is complete. It should evolve throughout the project.
At acquisition, consider your likely purchaser and preferred exit. During construction, review market conditions, costs and funding. As completion approaches, compare the potential returns from selling, refinancing, retaining or combining these approaches.
Most importantly, assess each option based on its overall return after finance costs, transaction costs, tax and risk, rather than focusing solely on the expected sale price.
Involved in property development?
Whether you are acquiring a new site, restructuring an existing development or considering how best to exit a completed scheme, decisions around structure, funding, timing and tax can have a significant impact on the final return.
Sumer Construction and Real Estate works with SME property developers to assess the commercial, structural and tax implications of development and exit decisions.
Get in touch with one of our Construction and Real Estate business champions to discuss your development and exit strategy.
