May 9, 2017

Global mergers and acquisition activity in the real estate sector is expected to rise with Europe seen likely to offer increased opportunities amid political uncertainty and Chinese capital remaining active in the search for assets.

Real estate made up nine percent of worldwide M&A activity and totalled about US$70 billion in the first quarter of this year, about 14 percent higher compared with US$61.5 billion registered in the first quarter of 2016, based on data from Thomson Reuters’s Mergers and Acquisitions Review. The Energy and Power sector led transaction activity, accounting for 18 percent of total deals done. In direct-real estate sales, global real estate activity fell one percent below the same period last year to US$136 billion, according to the latest Global Capital Flows data from JLL.

Amid Brexit unpredictability and elections in Europe, overall European inbound M&A activity totaled US$108.8 billion, a nine percent increase compared to a year ago and the strongest opening quarter since records began in 1980. While real estate did not feature in the top ten M&A deals, transactional activity for direct property sales climbed three percent to US$52 billion with London regaining the top spot, taking over New York, as the most traded city globally, based on JLL’s data.

“Europe probably offers the most opportunity at the moment, simply because of the political uncertainty. For companies within the M&A space, this may not be a bad time to look for a new partner or a new opportunity because nobody is quite sure how Brexit or the situation in the European Union may evolve,” says David Green Morgan, JLL’s Global Capital Markets Research Director.

While real estate M&A volume should increase towards the end of the year due to continued interest from institutional investors to gain real estate exposure, finding companies to acquire is a challenge.

“There are only a finite number of real estate companies out there. Unless the price is attractive, these companies would probably rather choose to stay as a private entity and operate as they are,” says Green-Morgan.

The exit multiples for the real estate industry for the quarter is high relative to other industries, at 19.3 times earnings, compared with, say, technology at 16.4 times and energy and power deals at 17.3 times, based on Thomson Reuters’ data.

“With rising real estate values, buyers have to factor in the assets companies are holding, which would be valued very highly at the moment. I suspect that is why the multiples are so high to convince these companies to sell,” says Green-Morgan.

China’s outbound M&A drops

China’s total outbound M&A activity across all sectors in the first quarter of 2017 posted US$25.8 billion from 181 deals – a nine percent drop in the number of transactions, but a decrease of 70 percent in value compared to the same period last year. In direct real estate transactions, China’s capital outflow also registered a decline – falling 36 percent from the same period a year earlier. Although the data followed Beijing’s efforts to stem capital flight, Green-Morgan says the decline in capital outflow may not be a direct result of the government rules.

“We don’t see a real change in their appetite for international real estate and so the real issue could be the current political uncertainty in Europe,” he says.

Chinese companies were active in their domestic market, however. In the first quarter, Shenzhen Metro Group’s purchase of property firm China Vanke for US$5.6 million was the second-biggest M&A deal in Asia Pacific and Green-Morgan believes Chinese investors will continue to seek exposure to real estate.

Looking forward, JLL expects global direct real estate transactions to total approximately US$700 billion – little changed from 2016 levels – and Green-Morgan also expects M&A volumes in the sector to increase.

“We have noticed an increased interest in M&A from different institutional investors. As a result, volumes should in theory increase over the rest of 2017, but M&A transactions can be complicated and sometimes take a long time to reach fruition. While there is more interest in M&A activities, finding companies to acquire is a little more difficult,” says Green-Morgan.

“There is certainly enough capital for M&A to occur, but whether it actually happens is a bit uncertain. There’s plenty of money but the opportunities are becoming slightly more limited.”


David Green-Morgan

Global Capital Markets Research Director, JLL

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