FAQ: What Hold Period Works Best in Secondary Markets?
Seven to ten years, and the reason is liquidity rather than returns. Why the three-to-five-year hold that works in primary markets transfers badly.
Short answer: seven to ten years, against the three to five that is conventional in primary markets. The reason is liquidity, not returns.
Why the standard hold does not transfer
The three-to-five-year hold exists because it matches a value-add business plan — renovate, lease up, stabilise, sell — and because in a liquid market you can reliably transact at the end of it.
The second half is what breaks in a secondary or tertiary market. A three-year plan needs a sale in year three. If the market gives you four comparable trades a year and you happen to reach year three in a soft window, you are not selling on schedule, and a business plan that depends on a specific quarter is a plan with a single point of failure.
A longer hold does not make the market more liquid. It gives you more windows to transact in, which is the thing that actually matters.
What the hold period is really buying
More exit opportunities. Over ten years you will encounter several periods where the market is receptive. Over three you might encounter none.
Time for supply to be absorbed. A delivery wave takes two to four years to work through. A three-year hold beginning just before deliveries lands you in the worst part of it; a ten-year hold outlasts it.
Debt structure options. Longer holds justify long fixed-rate debt — ten-year agency terms, life-company debt — which removes maturity risk entirely. A three-year hold pushes you toward bridge debt, which is the structure that produced most of the recent distress. See floating vs fixed rate structures for thin-liquidity CRE.
Amortisation. Ten years of principal paydown materially reduces refinance risk and increases net proceeds at sale.
Transaction cost amortisation. Acquisition and disposition costs in commercial can run several percent each. Spread over three years that is a meaningful annual drag; over ten it is minor.
The cost of a longer hold
Being honest about the trade:
IRR falls, even when total profit rises. IRR rewards speed. A deal returning 2.0x over five years shows a higher IRR than the same 2.0x over ten. If you or your investors are measured on IRR, a long hold looks worse on the metric that gets quoted — which is one reason so many sponsors underwrote short holds into markets that could not support them.
Capital is committed longer, with less flexibility to redeploy.
More time for the thesis to break. Ten years is long enough for an employer to leave or a market to turn. That is a real risk, and it is why the de-risking signals need to be monitored rather than assumed away.
Capex arrives. Roofs, HVAC, parking. A ten-year hold owns a full capital cycle that a three-year hold passes to the next buyer.
Matching hold to strategy
| Strategy | Hold in a secondary market | Why |
|---|---|---|
| Stabilised yield | 10+ years | Return is current income; there is no reason to transact |
| Light value-add | 7-10 years | Plan takes 2-3; the rest is exit optionality |
| Heavy repositioning | 5-7 years | Plan takes 3-4, and needs margin for delays |
| Ground-up development | 5-7 from start | Entitlement and construction consume years before lease-up |
| Opportunistic or distressed | 3-5, with a defined buyer | Only if you know who buys it |
The pattern: business plan duration plus three to four years of exit optionality. In a primary market that buffer can be one year. In a tertiary market it should be four.
How to underwrite a longer hold honestly
Model the exit in a range of years, not one. Show returns for a sale in years 7, 8, 9 and 10. If the deal only works in one specific year, it is fragile.
Use realistic exit cap expansion across the whole range — see how much exit cap expansion should you model.
Include a full capex cycle. A ten-year hold pays for the roof.
Match debt to hold. A ten-year plan on five-year debt has a refinance in the middle of it; underwrite that refinance rather than assuming it.
Report equity multiple alongside IRR. For a long hold, the multiple is the more honest headline, and saying so up front avoids the metric doing the arguing later.
For sponsors with limited partners
A longer hold has to be sold at the raise, not discovered at year five. Investors told to expect a five-year hold who are still in at year eight will assume something went wrong, whether or not it did.
State the range up front, explain that it is a function of market liquidity rather than a lack of ambition, and report against it. See how to explain exit timing to LPs in volatile cycles.
What to do next
- Model the hold with the IRR & hold period calculator.
- Decide at maturity with the refinance vs sale decision tree in secondary cities.
- Plan the portfolio view in exit and rebalancing strategy for emerging market portfolios.
Sources
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