There were 120 real estate M&A deals across Western and Central and Eastern Europe in 2019, barely changed from the 124 deals seen the year before, while value climbed 8% on 2018 to US$33.8 billion.
Last year’s activity fell short of the market peak in 2014, when the European real estate sector recorded US$66.7 billion in M&A transactions. However, that spike was courtesy of a small handful of unusually large deals—volumes in 2019 were only 17% down on the 144 seen in 2014.
Last year’s robust real estate data came during a period when broader M&A activity dipped amid uncertainty about the global economic outlook, particularly as the trade dispute between the US and China continued to escalate. Global M&A activity in 2019 fell by around 9% in both value and volume terms on the year before.
The search for scale
The relative strength of the real estate M&A market in Europe last year can be partly explained by the ongoing search for scale in the sector. Competition is fierce, with demand for real estate assets high among global investors frustrated by historic low interest rates and yields in the fixed income markets. This has put pressure on listed real estate companies to increase in size and to diversify, in order to attract investors and secure the best assets.
The largest European real estate deal of 2019 is a prime example: The merger of Germany’s TLG Immobilien with its rival Aroundtown, announced in November, will create a commercial real estate company with more than US$27 billion in assets. The combined business will be Europe’s fourth-largest listed retail company once the transaction is completed, with office, retail and hotel assets in Germany and the Netherlands, as well a residential portfolio.
In Sweden, meanwhile, the US$4.8 billion domestic merger between SBB Norden and Hemfosa—both community property owners—provided another example of this appetite for consolidation. The deal was the second-largest European real estate transaction of the year and creates the Nordic region’s largest social infrastructure company.
Sweden recorded more M&A activity by value in 2019 than any other country (the UK was the most active country, by volume, with 22 deals). Last year also saw Sweden-based Hembla sold to Germany’s Vonovia for US$3.7 billion, as the latter sought to expand its international residential property portfolio.
Online growth underpins real-world dealmaking
Another factor driving real estate M&A in Europe has been the rapid and inexorable growth of e-commerce. This continues to create opportunities for businesses throughout the retail value chain, from logistics to warehousing.
Blackstone’s launch in September of Mileway, a pan-European logistics real estate business, reflects the private equity group’s efforts to exploit such opportunities. It brings together its logistics properties in and around major European cities that serve the last-mile needs of its customers. In December, Mileway agreed to pay US$929 million to acquire Hansteen, the UK-based real estate investment trust (REIT) with a portfolio slanted towards light industrial warehouses that support urban distribution.
Further activity in this area is to be expected, given the continued growth of e-commerce. Last year’s biggest deal of this type in Europe was the US$1 billion sale of 22 logistics assets by French supermarket chain Carrefour to property manager Argan. But that was relatively small, compared to the largest transactions globally in this space: Blackstone’s US$13.4 billion purchase of the US warehouse assets of Singapore’s GLP, and the US$12.2 billion merger of logistics firms Prologis and Liberty.
PE funds raise record sums
Further private equity activity is also likely elsewhere in the real estate sector, given the significant sums raised by funds and the perception that REIT valuations are attractive. Globally, real estate-focused funds amassed US$150 billion worth of dry powder last year according to Preqin, an all-time record. Property group CBRE points out that many REITs are currently trading at significant discounts relative to the value of their underlying assets.
Deal activity in this area to date has been relatively limited, with potential REIT acquirers conscious that valuations may not yet have reached the bottom. However, there have already been some transactions. In Ireland, for example, the UK’s Henderson Park Capital Partners agreed to pay US$1.5 billion for the Dublin-based Green REIT in August 2019.
Such deals mirror activity in other regions, with Japan, for instance, recording its first-ever hostile REIT takeover last year. By and large, European REITs are smaller than their North American and Asian counterparts, providing many more digestible opportunities for consolidation.
Real estate outlook remains strong
In 2019, Europe’s real estate M&A market accelerated during the second half of the year after a somewhat slow start, and the year ahead looks similarly strong. The five largest deals of 2019 were all unveiled during the second six months of the year; 2020 may yet see further increases in transaction activity. The macroeconomic outlook is supportive, with little sign of interest rates rising from their current record lows. And there is scope in some countries for further easing of monetary policy to mitigate the effects of the slowing global economy.