Real estate M&A value jumped 116 percent to US$74.9 billion in 2018, with deal volume staying flat at 46 deals

The large spike in value in the real estate sector has been driven by attractive pricing on prime assets that has resulted from falling stock prices.

The disparity between stock prices and underlying real estate values has led over the past year to a decrease in single-property transactions and an increase in transactions involving portfolio companies.

Declining stock prices have been particularly acute in the retail sector. Brookfield, the Canada-based alternative assets manager, for example, took control of General Growth Properties (GGP), the second-largest shopping mall owner in the US, in a US$26.7 billion deal. Valuations for retail property have plummeted, as e-commerce keeps shoppers at home and retailers close stores. Investors like Brookfield, however, see an opportunity to invest and redevelop sites in attractive urban locations.

Many companies holding retail assets are facing pressures as a result of tensions in the wider physical retail business. However, occupancy levels in prime locations remain strong, and in areas that have seen some large retailers leave, there are opportunities for redevelopment and the potential for good returns on investment.

116%
Percentage increase in value of US real estate M&A compared to 2017

PE turns to real estate

Private equity managers, meanwhile, have raised huge levels of cash for real estate strategies. According to data provider Preqin, there is at least US$266 billion worth of real estate dry powder available for deals, pushing up private equity activity in the sector. Blackstone, for example, acquired LaSalle Hotel Properties in a US$3.7 billion buyout.

The influx of private equity into the sector has led to an increase in M&A activity—and larger deals. Large, well-capitalized investors are capable of taking down dozens of properties in a single transaction whether as a portfolio transaction or a corporate acquisition.

As for what to expect in 2019, industrial real estate is one category that will continue to attract interest from investors. Such properties are solid performing assets that are set to appreciate steadily year after year. There is strong demand for industrial space to house distribution centers close to cities. There are just not enough good sites, and demand continues to outstrip supply.   

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