Global M&A Trends in Real Estate

While the real estate industry remains in a state of transition to an environment with a higher cost of capital, the business climate in which real estate dealmakers are operating has become more favourable, given recent progress on inflation and the likely reduction in interest rates globally. We expect this will boost investor confidence and consequently lead to a revival in real estate transaction activity in 2024.

The real estate sector continues to face challenges that will influence the size and shape of M&A activity in the year ahead. Dealmakers are increasingly considering the need to be more flexible and creative in structuring real estate deals as they seek to optimise the operational performance of their assets and adjust to the higher cost of capital. Other near-term uncertainties that may influence the pace of dealmaking in 2024 include the outcome of upcoming elections around the world and the impact of ongoing geopolitical tensions on cross-border M&A activity. Medium- to long-term megatrends—such as demographic shifts, housing affordability, decarbonisation and digitalisation—are all important factors for dealmakers to consider as they construct or rebalance their real estate portfolios.

Fundamentals in most real estate sectors are generally strong; investor demand for quality assets remains healthy. However, the office subsector—particularly in the US—continues to face uncertain demand and is consequently seeing a higher level of stress. Given the outsize impact of the office subsector on the perceived risks and opportunities in the broader commercial real estate sector, this creates uncertainty about valuations. Overall, uncertainty about asset prices remains a key factor in holding back certain transactions for now. We expect distressed transactions will continue to occur. However, these will likely remain at lower levels compared to those previously witnessed during the 2008 global financial crisis, given comparative supply and leverage levels and the desire of lenders to work with sponsors to maintain relationships.

We expect the following areas to be M&A activity hotspots during 2024:

Strategic adjustment

Uncertain macroeconomic and political environments have created challenges for raising capital. On the credit side, the availability of capital for debt refinancing and new investments is expected to decrease as banks and life insurance companies tighten lending standards given expected covenant and loan servicing issues. In addition, bonds and other assets offer higher risk-adjusted returns, pushing some institutions to reduce their real estate allocations in favour of fixed income. However, with interest rate cuts expected in 2024, lending standards should begin to ease, which will result in improved credit availability. In the meantime, we expect that credible borrowers with strong plans will still be able to secure funding. 

In North America and Europe, the pullback from traditional lenders is creating opportunities for private lenders to step in to fill the funding gap. More lending is expected to come from private credit funds, alternative lending platforms and non-bank institutions in 2024 than in 2023. Similar to Western countries, countries in the Asia Pacific region, also are experiencing a capital squeeze, albeit from direct government intervention. However, this impact is mitigated in many Asia Pacific countries by a significant amount of real estate under the ownership of wealthy investors who do not leverage debt to fund developments.

On the equity side, many banks now require borrowers to put in more equity to lower the project’s loan-to-value ratio, or, alternatively, keep deposits with the banks. However, we expect there will be a growing availability of equity in 2024 as sponsors deploy their dry powder. In Europe, active equity notably comes from high-net-worth investors in Asia, who desire high-quality properties in prime locations such as Paris and London. With significant equity waiting on the sidelines for distressed buying opportunities, we expect to see investment volumes pick up in 2024; value corrections are expected to accelerate in the next 12 to 18 months, especially as refinancing activity picks up.

Recalibration of expectations

We expect more opportunistic funds to raise capital in 2024, waiting for distressed real estate buying opportunities to become available. Real estate owners and operators are facing a conundrum of whether to hold onto underperforming assets until interest rates go down or take a loss now to save further losses down the road. Owners with no immediate incentive or pressure to sell are unwilling to do so, which is stalling sales transactions. Low transaction levels are limiting investors’ ability to negotiate pricing that buyers and sellers can agree to and keeping the bid–ask gap wide. However, as the industry recalibrates expectations, market participants are expected to start transacting again.

A business reinvention imperative

PwC's 27th Annual Global CEO Survey finds that 44% of real estate CEOs think their business will be economically viable for ten years or less if their company continues on its current path, up from 36% of those surveyed a year ago. From the megatrends—such as climate change, technological disruption and demographic changes—to macroeconomic and other industry factors, CEOs are recognising the need to adapt their strategies and transform their businesses to thrive—or even just survive—in this new era.

With slower growth prospects in the real estate industry, companies need to streamline their operations, leverage new technology for repetitive administrative tasks and reduce operating costs by achieving improved energy efficiency, among other actions.

Sustainability as a lever for value creation

We expect environmental, social and governance (ESG) will be one of the main drivers behind real estate investment decisions across the globe. “ESG compliance is not a ‘nice-to-have.’ It’s a license to play,” says the CEO of a pan-European property company interviewed as part of the research behind PwC and the Urban Land Institute’s Emerging Trends in Real Estate® Europe 2024 report. Due to collective pressure from institutional investors, lenders and tenants, global regulatory compliance for climate and sustainability reporting and energy performance is a priority for real estate executives. CEOs are increasingly focusing on sustainability and energy efficiency as a means to create value. For example, companies that operate buildings that are more sustainable may be able to charge premium rents, improving margins and cash flow. In the US, soaring property insurance costs—or, in some cases, an inability to obtain insurance for a property—are eroding margins and putting owners at risk. Hence, CEOs focused on building a portfolio of sustainability-focused assets will be better positioned to mitigate risks and create new opportunities.

Technological change as a disruptor

Technology is expected to profoundly affect the entire real estate value chain, with real estate professionals continuing to integrate data, automate the movement and analysis of data, and identify insights for better decision-making. With generative AI continuing to create significant buzz, we expect dealmakers will incorporate the ability to leverage AI in analysing exponentially growing data into their due diligence processes and business models. Climate and sustainability are just one area in which AI is expected to help real estate CEOs take advantage of the proliferation of data. For example, AI is being used to assess the impact of climate change—from modeling climate risk on properties in different locations to monitoring tasks such as identifying water leaks or controlling central HVAC systems.

Global real estate transaction volumes and values declined by more than 40% during the first nine months of 2023 compared to the same period the prior year as dealmakers struggled with rising interest rates, financing challenges and many other headwinds. Deal values declined most in the Americas, with a 56% decline compared to 54% in EMEA and 31% in Asia Pacific. In terms of deal volumes, EMEA saw the greatest decline, with a 54% drop compared to 39% in the Americas and 28% in Asia Pacific. With real estate being so heavily influenced by local market conditions, we attribute the drop in Europe’s deal volumes in part to the region’s geographical proximity to two ongoing wars and macroeconomic challenges.

Real estate dealmakers who are successful at creating sustained outcomes will be those that are able to navigate current uncertain conditions and focus on value creation. In a more cautious capital market, agility and creativity in structuring deals—such as adding earn-out provisions for sellers to bridge bid–ask spreads or vendor take-back mortgages to manage financing gaps—will be an advantage. Dealmakers who are well prepared will be best positioned to act quickly when the right opportunities arise.

Explore our local M&A Trends in Real Estate from the following countries or regions: