Mergers & acquisitions (M&A) activity in commercial real estate (CRE) has multiplied in recent years, with experts seeing a connection between this higher-stake growth route and the competitive late cycle market. “Growth potential and increased scale usually play an important role and can be more relevant in late cycle when capital value and rental growth in many sectors is slowing,” affirms Dan Jones, senior director, M&A advisory at JLL. “Other features of late cycle economics such as record levels of dry powder, availability of cheap debt and a search for yield also support increased M&A activity,” Jones adds.
The recent merger between Germany’s TLG Immobilien and Luxembourg-domiciled Aroundtown has created a combine with over €25 billion of offices, hotels and residential, making it the third largest publicly traded European landlord by assets, after mall owner Unibail-Rodamco-Westfield and German housing firm Vonovia. “It’s no secret that the biggest players on the German commercial real estate scene have all been considering potential mergers in recent years,” says Oschrie Massatschi, Aroundtown’s executive director - capital markets. “Eventually we felt that combining with TLG would be a good match, probably the best out there.”
According to Massatschi, there are a number of key synergies between the firms. “We both focus on offices, and we both focus on Germany; TLG is very well positioned in top locations in areas such as Berlin, Leipzig, Dresden and Frankfurt; they also have a lot of potential from developments, so the portfolios will be very complementary.” Furthermore, the size creates the potential for DAX inclusion, which “overall will improve our liquidity, our free float”, Massatschi adds. The likelihood that the merger will achieve a higher rating compared to the single firms is compelling too, with significantly cheaper finance a potential outcome.
In addition, deals like this mean that both parties avoid the other teaming up with a rival. UK student housing specialist Unite’s £2.2 billion acquisition of peer Liberty Living, which has expanded the firm’s platform from around 50,000 to 73,000 beds, has received positive feedback from the analysts in part for this reason.
M&A is one of the few remaining strategies to grow at this point in the cycle.
Publicly listed investment targets
However, choosing the M&A route is not without its risks, making opportunistic players some of CRE’s hungriest takeover specialists. “Private equity firms are set up to focus at the higher end of this spectrum and are often first movers in new markets and sectors, usually working with entrepreneurial management teams,” notes Jones of JLL. “They identify the opportunity, unlock complex transactions, create the model, build the scale and prove the concept.”
The likes of Blackstone, Cerberus and Lone Star are still driving some of the industry’s most memorable megadeals. Blackstone expanded its AUM by 31 percent to $157 billion (€141 billion) at end-September 2019, driven in part by M&A activity. Key deals this year have included acquiring US industrial assets from Global Logistics Properties for $18.7 billion, buying Colony Capital's US-focused industrial arm for $5.9 billion (€5.4 billion), and Blackstone’s all-cash C$6.2 billion (€4.2 billion) acquisition of Europe-focused Dream Global REIT.
“M&A is one of the few remaining strategies to grow at this point in the cycle,” affirms Michael Schwöbel, former Managing Director Europe of Dream Global Advisors, Dream Global REIT’s asset management platform. “Pricing is quite tough as there’s a lot of money out there that needs to be deployed. That means it’s the right time for M&A deals and large portfolio transactions, such as the recent Millennium portfolio sale."
A desire to mitigate M&A risks has resulted in an increased appetite for large, good quality listed vehicles. Recent examples include Henderson Park’s acquisition of Green REIT and AXA buying Northstar Realty Europe.
JLL employee Jones adds: “The current levels of discounts to NAV in some sectors has also increased interest in public to private deals, but in reality, these are challenging to execute.” The recent offer by Gazit Globe to buy out Atrium European Real Estate is a case in point. Gazit’s bid to acquire Atrium at €3.75 a share triggered a rebellion by small shareholders in October 2019, 63 percent of whom blocked the bid, because they were worried that it would significantly undervalue the company.
Pursuing M&A strategies to manage expansion into new geographies can be an attractive option, in search of higher growth potential, the benefits of synergies, economies of scale and diversification.
“To grow cross border organically and build the infrastructure and expertise would take a lot of time and carries risk,” says Jones. “Bolting on a large complimentary portfolio or business with proven track record is therefore an attractive solution if well executed. A good example of this is Vonovia’s recent acquisitions of Victoria Park and BUWOG.” However, the cultural risks include business styles, systems, language and other unexpected integration issues.
Megatrends support M&A excitement
Despite potential perils, there are few signs of the M&A feeding-frenzy abating. Sectors that are benefitting from megatrends such as urbanisation, population growth and demographics are proving particularly attractive, combining growth dynamics with signs of resilience. Recent examples are LondonMetric’s acquisition of A&J Mucklow and the Primary Health Properties MedicX merger.
Proptech-backed businesses such as co-working offices are already primed for consolidation. US flexible office provider Knotel acquired a majority stake in French peer Deskeo last year, while the chequered rise of WeWork has nevertheless transformed the coworking sector’s prospects for good.
By Isobel Lee