After a standout 2018, real estate M&A has dropped significantly in the first half of 2019, but segments of the market such as logistics and hotels have remained attractive.

There were 19 real estate M&A transactions collectively worth US$24.8 billion during the first half of 2019, representing a 24 percent fall in deal volume and a 53 percent decline in value compared to the same period of 2018.

The comparison is skewed somewhat given that the first quarter of 2018 recorded the highest total quarterly M&A deal value in real estate since 2009. Nevertheless, the sector has experienced a significant slowdown so far this year.

This is a consequence of challenging sentiment in the retail sector, where bricks-and-mortar stores continue to suffer at the hands of online competitors. It also partly reflects the broader anxiety around asset prices seen at the end of 2018 and in early 2019, given stock market setbacks in December. The subsequent recovery in the stock market then led to a modest quarter-on-quarter rise in real estate deal values, from US$8.7 billion in Q1 to US$16.2 billion in Q2.

Nevertheless, there are reasons to remain optimistic about real estate M&A. The desire for income-producing investments in a low-interest-rate environment remains strong, setting the tone in an asset class that has become increasingly important for institutional investors. Net asset values are trading at close to stock prices in most sub-sectors of the market—the exception being retail—but not at premiums, providing a supportive backdrop for acquisitions.

It is also the case that some sectors of the market have held up much more strongly than was previously expected. Park Hotels' purchase of Chesapeake Lodging Trust, the third-biggest real estate deal of the year so far, comes at a time when hotels continue to post high occupancy rates.

Elsewhere, industrial real estate remains highly attractive, with the e-commerce sector struggling to secure the warehousing and distribution infrastructure it requires to support its pace of expansion. Blackstone’s US$18.7 billion acquisition of the US assets of GLP is a good example of a deal driven by this theme.

Meanwhile, REITs offer exposure to a physical asset class in the event there is a flight to safety among investors concerned about recession. And the dry powder held by private equity offers further support for real estate M&A, providing ready buyers for distressed assets, in particular, and smoothing out volatility in the cycle.

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