With global economic uncertainty, investors are placing a greater emphasis on real estate investment. According to data from Thomson Reuters Mergers and Acquisitions Review, in the first quarter of 2017, real estate made up 9 percent of worldwide M&A activity and totaled about $70 billion. This is about 14 percent higher than the $6.1 billion registered in the first quarter of 2016.
Those numbers show that investors continue to view real estate as a safe investment option in our current volatile environment. In fact, a survey done by MergerMarket found that 52 percent of investors believe the high rate of real estate M&A activity will continue or increase in the coming 12 months, especially in new markets where growth rates are strong and the prospect of making profits over investments is high.
Three major forces have been driving real estate M&A deals. First, the increasing cost of rent due to the expansion of the market. The extra cost has affected the returns that companies make, and in order to preserve profit, companies are looking to cut the operational costs and acquire a strong investments.
Second, there is increased competition because of the high demand for properties as confidence in the prospects of the global economy returns.
And, finally, the need for portfolio diversification as real estate can offer competitive risk-adjusted returns. Even factoring in the subprime mortgage crisis, private market commercial real estate returned an average of 8.4 percent over the 10-year period from 2000 to 2010, according to the National Council of Real Estate Investment Fiduciaries (NCREIF).
Asia-Pacific and Europe in the spotlight
Investors believe that the Asia-Pacific region will be the area most likely to see real estate M&A, followed by Europe in second place.
The Asia-Pacific market is driven by Chinese investors leaving the domestic stock market to seek cross-border assets as well as a burst of urbanization, a move from rural to urban centers. Additionally, countries including India are planning on introducing REITs, which make investing in real estate a more attractive option for companies.
In Europe, due to Brexit, companies are pulling out of the U.K. and investing in acquiring real estate assets in Western European countries like Germany, France, as well as in Central and Eastern Europe, where growth rates are positive, buyers exist and the operational costs of doing business within the Euro Zone are reasonable.
Office, residential, and healthcare sectors lead the race
While investors generally agree on the benefits of acquiring real estate assets, they do have preferences when it comes to segments within the sector. Office, residential and healthcare are most preferred as they are good options to diversify and reduce risks. While many sectors are underperforming, the outlook for occupancy and new buildings in these sectors is very strong. Companies are also gravitating and relocating to city centers to attract and recruit workers who don’t want to commute.
In the healthcare industry, with the help of technology, hospitals and healthcare systems are constantly seeking to improve efficiencies, reduce duplicate facilities and gain greater negotiating leverage with insurance companies. All of these factors are expected to drive more real estate acquisitions. In addition, these are the fast-growing areas that are positioned to capitalize on the aging population, and there are many assets that can be acquired.
The role of private capital
As previously mentioned, investing in real estate helps diversify portfolios and reduce risk, which makes it an attractive investment option for private equity firms and hedge funds. More and more private equity firms are launching or expanding real estate investment platforms both domestically and globally.
Prequin estimated earlier this year that private equity investors had an aggregate of $237 billion raised for investment in commercial real estate globally. That abundance of capital allows private equity firms to capitalize on companies that need to sell assets for capital or to rationalize costs. Hedge funds are also looking into real estate deals to help keep risks under control as the stock market continues to show signs of high volatility.
As in most sectors, regulatory hurdles, political instability and capital volatility are still barriers to real estate deals, but there are many positive trends to counter these risks, which are more than manageable. Investors’ appetites for real estate investment are likely to remain robust as strong valuations and the availability of capital will continue to drive activity.
Craig Clay is president, global capital markets, at Donnelly Financial Solutions.