Q3 Real Estate M&A around the globe: From Australia's momentum to US valuation battles

Australia heads back to the office

Ansarada’s latest Deal Indicators data for Q3 2023 shows that new Real Estate M&A deals commencing in Australia increased by 24% (QoQ) and by 4% (YoY). 

Data from JLL tells a similar story, showing a Q3 uptick in transactions in the commercial property sector (including office, retail and logistics & industrial segments). Most notably, office transaction volumes experienced a substantial 106% increase from Q2 2023, surging from $594 million in the June quarter to $1.2 billion in the September quarter. It is anticipated that a considerable number of deals will be finalized by the end of this year (JLL).

The past year has been a period of post-pandemic adjustment, making the industry more resilient and ready to seize opportunities. Morgan Stanley Australia's chair of investment banking, Tim Church, predicts strong growth for the commercial real estate industry in Australia in 2024 and 2025. The country's population growth, triple-A credit rating, long recession-free period, good debt-to-GDP ratio, and diversified economy make it an attractive prospect for overseas investors.

Office assets are gaining popularity as people return to the workplace, retail is transforming into entertainment spaces, and industrial assets are thriving due to the e-commerce boom.

Encouraging people to return to the office is highlighted as important for increasing productivity and creativity. CBRE’s latest report shows that Australian CBD office markets are rebounding from the post-pandemic downcycle more robustly than initially expected, according to CBRE's latest report. As of Q2 2023, 62% of Australian CBD office properties had occupancy rates exceeding 90%, and 15% had rates between 80% and 90% (CBRE).
 

US Real Estate M&A faces valuation challenges

It’s a different story in the US, where office vacancy rates are expected to reach 18% by 2030 – a 55% increase since 2019 (Fortune). But it’s not all doom and gloom for US Real Estate companies. New M&A deals commencing in the sector increased by 33% in Q3, and 3% in the US over the last 12 months, according to Ansarada’s Deal Indicators data.

The Real Estate M&A scene in the US is anticipated to experience a period of relative calm for the remainder of the year as it faces challenges affecting both public and private firms. 

Key challenges in this landscape revolve around the cost of capital and uncertainties pertaining to asset valuations. The financial burden associated with securing funds for transactions is notably high, posing a significant barrier to engaging in M&A activities within the sector. At the same time, the lack of confidence or clarity in determining the value of real estate assets adds another layer of complexity, making it challenging for parties involved in M&A deals to reach mutually agreeable valuations.
 

UK & European Real Estate M&A faces quarterly setback but maintains stable YoY growth

 
New Real Estate M&A deals were down 29% QoQ in UK&I, and down 67% QoQ in Europe this quarter. Year-on-year results were up, however; UK&I saw a 2% YoY increase, while Europe saw a 3% YoY increase in M&A activity over the last 12 months.

The slowdown in Real Estate M&A can in part be attributed to the impact of monetary policy adjustments aimed at addressing inflation. Interest rate hikes by entities like the US Federal Reserve and the European Central Bank have led to heightened borrowing expenses, placing a strain on valuations on a global scale.
 
The Commercial Real Estate sector is particularly challenged by transformations in how businesses function and how individuals adapt to new lifestyles in a post-COVID-19 era, some of which were already in motion before the pandemic.
 
However, it’s strongly anticipated that these changing preferences will persist in creating opportunities for M&A. Investors are likely to explore emerging investment themes, reshape operational frameworks, and strategically reposition themselves for prospective growth.

In Europe, the growing need for buildings to meet specified energy efficiency standards due to ESG regulatory changes is fuelling demand for high-quality assets. From 2023 (Netherlands) and 2030 (UK), office buildings must attain an energy performance certificate (EPC) rating of C or higher. As more businesses pledge to decarbonize and achieve net zero objectives, landlords are aligning their leasing portfolios with these environmental goals. This shift is driving an increased demand for innovative office spaces incorporating green technology and amenities. Europe’s Industrial Real Estate sector is being impacted by similarly strict environmental regulations.