{{item.videoDuration}}
{{item.title}}
{{item.text}}
{{item.videoDuration}}
{{item.title}}
{{item.text}}
A focus on value creation and the emerging role of private credit are driving real estate M&A.
In our January M&A 2024 outlook, we highlighted the challenges the real estate sector faces as it adapts to a rapidly evolving environment characterised by higher capital costs, tighter lending standards, persistently high bid-ask spreads, and technological disruption. While these factors continue to shape the landscape, new dynamics are emerging that are driving significant change within the sector. Real estate managers are now navigating an increasingly complex market, where the focus is shifting towards strategic value creation, resilience, and adaptability. The rise of private credit, the expansion into non-traditional asset classes, and the growing pressure from sustainability initiatives are compelling industry players to rethink their operating models. They are seeking value creation opportunities through M&A deals and broadening their risk profiles. Read on for insights into the trends in real estate M&A globally and in Switzerland.
In the first quarter of 2024, global real estate deal volumes declined, primarily due to uncertainty regarding interest rates and the ongoing divergence in valuation expectations between buyers and sellers. The real estate sector is undergoing significant structural changes driven by market dynamics, digital innovation, and sustainability considerations. This transformation is evident in the diversification of asset classes beyond the traditional five (retail, industrial, multifamily, hospitality, and office) to include higher-growth sectors such as student housing and data centres.
Moreover, higher operating costs in the current environment are prompting property managers to reassess and strategically adjust their business models, and they are actively exploring value-creating opportunities through M&A. These shifts are also attracting non-traditional investors, including high-net-worth individuals, family offices, private credit, and sovereign wealth and infrastructure funds. These investors are stepping in to fill the funding gap left by the withdrawal of traditional bank and life insurance investors
While distressed sales have been lower than expected and M&A activity remains limited due to the high cost of capital, the business climate is expected to improve as interest rates begin to ease. This turnaround should lead to an increase in real estate M&A transactions in 2024, as existing investors adapt to the new environment and opportunistic investors take advantage of emerging deals. Overall, we expect dealmakers to become more optimistic about M&A, driven by the broadening of asset classes, the increasing role of private credit, and a strong focus on value-creation strategies.
Key themes driving the real estate M&A market
A new look at market distress
In early 2024, it was anticipated that distressed sales would dominate the real estate market due to maturing loans, declining valuations, and interest rate uncertainties. With US$600bn of US commercial real estate loans maturing in 2024 and similar volumes expected in 2025 and 2026, according to MSCI Mortgage Debt Intelligence, the challenge is substantial.
Despite declining global real estate transaction volumes, positive developments such as interest rate cuts offer some hope. Lessons learned from the Global Financial Crisis (GFC) are leading lenders and borrowers to favour refinancing and modifications over foreclosures, anticipating better market conditions in the future. In 2023, US$214bn of US real estate loans were modified or refinanced. In Europe, while distressed sales have increased, overall activity remains below post-GFC levels.
On a global level, a solution-based approach to maturities is reducing the risk of significant market distress. Investors seeking higher returns will need to explore alternative property types and find sources of capital willing to accept higher risk.
Emerging property types
The real estate sector is evolving as investors seek higher yields and tenants change how they interact with properties. Interest is growing in niche asset classes such as infrastructure and student housing, which are complex and operationally intensive, impacting returns and reporting.
In the first quarter of 2024, the global transaction volume of income-producing properties was US$130.2bn, down 19% year-on-year, partly due to a shift away from traditional sectors such as office buildings. Investors are moving towards data centres, student accommodation, and build-to-rent housing due to technology needs and housing shortages. Despite the overall decline, sales in alternative sectors rose 41% in the first quarter of 2024, accounting for 70% of the total volume.
In addition, premium retailers are purchasing prime real estate to expand into the hospitality and residential sectors. Operationally intensive strategies are becoming essential to generate higher returns in the current interest rate environment.
The rise of private capital
Declining commercial real estate values have led traditional banks to tighten lending standards, creating opportunities for private lenders. The IMF reports that non-institutional lending to corporate borrowers reached approximately US$2.1tn in 2023 and is expected to increase in 2024.
PERE, a publication covering the global private real estate markets, notes that major real estate debt managers have increased their 2024 fundraising targets by around 19% year-on-year. Further, new sources of equity capital, such as family offices, sovereign wealth funds and non-bank institutions, are emerging and ready to deploy their capital.
The role of talent
In the current environment of inflation and elevated interest rates, real estate fund managers must find operational efficiencies to generate returns and create value. This shift requires reassessing corporate infrastructure and adopting new strategies such as ground-up development and real estate lending.
To support these objectives, firms need to attract talent with the right skill sets. Recent platform deals, such as Pretium’s acquisition of BH Management Services, and key hires, such as Blue Owl’s recruitment of GIC’s former Global Head of Real Estate Credit, highlight this trend. Strategic acquisitions and talent realignment will be crucial for driving returns and entering new markets in the months and years ahead.
Real Estate deal values, 2020-Q1'24
Note: Total real estate transaction values (excluding development properties) based on properties and portfolios of $10m and greater.
Source: MSCI Real Data Analytics
Global real estate deal volumes declined in the first quarter of 2024, primarily driven by two factors: uncertainty in the interest rate environment and a persistent valuation gap between buyers and sellers. However, we anticipate a shift towards greater market stability in the coming months. This outlook is based on the European Central Bank’s interest rate cuts in June 2024, along with the increasing likelihood of a rate cut by the US Federal Reserve. We expect these monetary policy adjustments to act as catalysts, stimulating transaction activity across various asset classes in the real estate sector.
Real estate hotspots to watch
Student housing
Colleges and universities worldwide are struggling to meet the rising demand for student housing, with projections showing continued growth in enrolment. Data from RealPage shows that as of April 2024, pre-lease occupancy at 175 US universities for the 2024/25 school year was 72%, up from under 70% prior to 2023. Rent increases of 5-6% year-on-year further highlight the gap between demand and supply for student housing.
Although transaction volumes in student housing are generally low, recent deals underscore the sector’s potential, such as KKR’s US$1.6bn acquisition of Blackstone’s 19-property portfolio and Mapletree’s US$1.3bn purchase of Cuscaden Peak’s 31-property portfolio. We expect M&A activity in the student housing sector to increase, driven by strong fundamentals and investors seeking recession-resilient investments.
Sovereign wealth funds and sustainability
In 2024, elections in major economies are likely to impact global real estate investments, particularly in areas related to sustainability and affordable housing. Governments are increasingly incorporating ESG (environmental, social, governance) factors into sovereign wealth and pension fund investments. Notable examples include the European Commission’s office sales in Brussels for redevelopment and the Norwegian Sovereign Wealth Fund’s real estate ESG commitments.
Private real estate investments are also focusing on sustainability, with funds driving green projects to decarbonise existing brown assets. We expect managers to consider climate impact to comply with sustainability regulations. Data centres, a key emerging investment area, are under scrutiny due to high energy consumption and heat emissions. Meeting tightening regulations will require the sector to adopt green measures, with M&A playing a crucial role in facilitating these transformations.
Key take-aways for real estate dealmakers in H2 2024
The property industry is adjusting to a higher cost of capital environment, but the outlook for dealmakers is improving as inflation stabilises at lower levels and interest rates are cut. Successful real estate dealmakers will be those who can swiftly adapt their strategies to seize opportunities, attract new talent, and sustain value creation. In a dynamic market, agility and strategic alignment with market trends provide a significant advantage. Well-prepared dealmakers will be best positioned to act quickly when the right opportunities arise.
What drives real estate M&A in Switzerland?
In 2024, the Swiss National Bank (SNB) lowered its key interest rate twice: first to 1.5% in March, and then to 1.25% in June. These measures were taken in response to stable inflation, moderate economic growth, and rising unemployment. The aim of these rate cuts is to stimulate investment and demand, countering a potential economic downturn. Despite these interest rate reductions, rental prices continue to rise, particularly for new apartments, due to a persistent housing shortage and insufficient construction activity to meet the high demand.
In the construction sector, investment in civil engineering and renovation has increased, while building costs in the high-rise sector remain high, limiting construction activity. The office space market presents a mixed picture: although rents declined slightly in the last quarter, they are up year-on-year despite high vacancy rates. The investment property market is recovering after negative returns in 2023, especially in multi-family housing, where market values and demand are rising again.
The real estate market is also influenced by strong immigration, which continues to drive housing demand and exacerbate existing shortages in supply. Despite these challenges and stable but limited construction activity, demand for real estate remains high, further pushing up prices. At the same time, regional differences persist, with some areas more affected by price increases and housing shortages than others.
In the office space market, demand remains stable in some regions despite higher vacancy rates, indicating an imbalance between supply and demand. Overall, the market is showing signs of stabilisation as the SNB’s interest rate cuts support the economy. However, challenges such as high rental prices and limited supply in the housing market persist.
“Compared to the global real estate market, the Swiss real estate sector is showing signs of recovery, with positive returns in residential property during the first half of 2024. This upturn, reflected in rising market values and growing demand for multi-family homes, indicates a stabilisation following previous downturns. The main driver of this improvement is the Swiss National Bank’s interest rate cuts in 2024.”
Sebastian ZollingerDirector, Head Real Estate Advisory, PwC SwitzerlandM&A industry trends in Switzerland
Learn about the key trends driving M&A activity in Switzerland
{{filterContent.facetedTitle}}
{{contentList.dataService.numberHits}} {{contentList.dataService.numberHits == 1 ? 'result' : 'results'}}
{{contentList.loadingText}}
{{contentList.loadingText}}
Contact us
Sebastian Zollinger