ANZ real estate M&A set to rebound after tough quarter

Despite a challenging start to 2024, M&A activity in the Australian and New Zealand real estate sectors looks set for a rebound in the second half of the year, with industrial deals predicted to lead the way.

By Justin SmithTue Jun 25 2024Mergers and acquisitions, Due diligence and dealmaking, Advisors, Industry news and trends, CEO-CFO

Real estate M&A takes a hit in Q1

Australian and New Zealand real estate market deals were down 21% in the March 2024 quarter compared to the December 2023 quarter, according to the latest Indicators data from the Ansarada Deals platform. On an annual basis, growth in M&A real estate deals is down 5% on the previous year.

It’s a decline that is occurring against the background of an economic slowdown and shifting market dynamics across the region. Multiple economic headwinds are contributing to the slowdown, including heightened inflation, higher interest rates and rising energy prices. However, despite these challenges, Australia’s economic growth has been stronger than expected, driven by factors such as elevated net migration, robust private and public investment, and healthy labour market conditions.

Nevertheless, the growth outlook for 2024 remains below trend due to cost-of-living pressures and higher interest rates impacting overall consumption. These changes indicate that dealmakers should keep their focus on long-term sustainability as interest rates begin to normalise in the coming year. In this article, we’ll look at the prospects for commercial, office and industrial real estate – as well as the likelihood of a recovery for the sector later in 2024.

Commercial property on the road to recovery

In 2023 the commercial property sector saw a sharp drop in deals, falling to $39.6 billion, according to MSCI. It’s the most significant drop since the global financial crisis, driven in part by shifting work patterns as more people look to work from home. Higher interest rates have also had an impact on the domestic real estate market. In addition, offshore buyers are starting to give Australian office assets the cold shoulder.

However, the remainder of 2024 looks likely to see increased deal flow. According to Knight Frank, 2024 is shaping up to be a better year for commercial property investors. Three key developments are driving this positive outlook, including a more favourable macroeconomic backdrop, narrowing bid-ask spreads, and a shift in the outlook for relative returns across asset classes.

Deals dry up in the office sector

The Indicators data found that office sector deals continue to slow, with Australian office capital market activity at its lowest in over a decade. This reduced activity is impacting the overall deal flow in the real estate sector, reflecting softer buyer demand and leading to an effective stalemate in capital markets.

Vendors are holding onto assets as dealmakers struggle to determine fair market value for Australian office property. Other contributing factors include high interest rates, global investor caution, and soft leasing market conditions.

While these conditions are expected to continue throughout early 2024, the headwinds are anticipated to ease in the second half of the year. In addition, the monetary policy outlook for 2024 is more stable than last year, when the Reserve Bank of Australia increased the official cash rate five times. As at 21 May 2024, the ASX futures market was pricing in one 25bps rate cut by April 2025.

Industrial real estate an outlier

Contrary to the rest of the real estate sector, deals in industrial real estate are undergoing substantial growth – partly driven by the increasing demand for warehouse space. This sector, along with alternates, continues to deliver rental growth above inflation, with the industrial and logistics sector recording remarkable rental growth of 18% in 2023.

Ben Boyd, Managing Director & Head of Real Estate at MA Moelis Australia, anticipates this trend to persist into 2024, with a focus on self-storage, land lease communities, data centres, and living, including build-to-rent and co-living. Overall, the industrial real estate sector is forecast to reach $410 billion in the next decade.

The Australian data centre market is also expected to grow significantly, according to Corrs Chambers Westgarth, with a forecast compound annual growth rate of 7.05% through to 2028. Despite a substantial amount of supply being added to the Australian datacentre markets, more will be required to keep up with demand.

Resilience and an emerging recovery

Despite the headline falls in M&A activity in the first quarter of calendar 2024, the real estate sector has demonstrated remarkable resilience overall. The Indicators report shows that compared to the same period two years ago, real estate M&A growth is up 26%. Industrial and logistics assets continue to outperform, and retail centres remain attractive.

Amid these challenges, opportunities for strategic growth, industry consolidation, and value creation persist – particularly in the middle market segment. Companies are adapting to these market challenges by focusing on innovation and profitability over growth through acquisitions. Proactive investors and those with strong balance sheets have been capitalising on these opportunities to unlock value by acquiring strategic and underperforming assets.

This strategic shift is reflected in reduced deal valuations, signalling a pragmatic approach to deal-making in response to market uncertainties. The resilience of the sector, coupled with strategic adaptations, suggests a promising future for real estate M&A in Australia and New Zealand.

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