Why real estate companies see M&A as essential for sector rebound

Real estate and construction executives see recovery ahead, along with an uptick in cross-border and cross-sector M&A.

Geopolitical considerations also hindered REC sector mergers and acquisitions. In the survey, 59% of REC executives say they failed to complete a planned acquisition because of geopolitical challenges and 72% altered their strategic plans in response to these same uncertainties.

Like many companies, most REC companies say they conducted a comprehensive strategy and portfolio review during the pandemic. Eighty percent of executives say they conducted a review, largely accelerated by the pandemic. The broad consensus among REC executives is that competition for investments will increase during the next 12 months, with 74% expecting increased competition in the year ahead, largely driven by private capital.

What REC companies can do now to ensure future success

Looking forward, companies with built-up capital will have a significant advantage over competitors to capitalize on opportunistic assets in the marketplace. Further, strong companies may find opportunities during this time and act on previously shelved deals and business transformation.

The following actions can help REC companies be ready to seize the moment.

• If not undertaken yet, revisit portfolios and conduct bold reviews with a focus on new market dynamics, talent expansion, digital transformation and access to capital. Investors will need to analyze the long-term impact that COVID-19 will have on differing asset types. One example is the future of corporate office utilization as remote work becomes increasingly prevalent.
• Identify underperforming assets and act quickly to divest. As noted above, companies that have accrued additional capital by divesting underperforming properties and laggard-growth sectors will be better poised to move when opportunistic assets become available during the early recovery stages of the post-pandemic era. Companies that have previously concentrated on domestic assets may diversify by adding international properties to their portfolio, and vice versa. Likewise, investors that focused solely on one asset type may explore alternative property classes to have a more balanced portfolio and mitigate risk.
• Leaders should continue to invest in talent and digital transformation regardless of financial circumstance. Perhaps more than ever, future acquisitions will require proper due diligence and the effective integration of assets. Post-pandemic, the process will be more complicated. The right talent and data will help companies to successfully capitalize on future opportunities and enable growth.
• Accelerating and infusing the use of emerging technologies into the deal process not only adds speed, it also supports better outcomes. Executives need to understand the positive impact of emerging technologies on their deal strategies.

Conclusion: how creative M&A can pave a path to stability, future growth

Real estate is simple economics. Deals are made when the price point for an asset reaches equilibrium on supply and demand curves. The barrier that the REC sector may experience in the near term is establishing market valuations or pricing when there is a lack of confidence in underwriting assumptions. Acquisition teams will be challenged with incorporating the short- and long-term impacts of the pandemic into their financial modeling. Investing in technology and talent now may help address uncertainty and lack of confidence in forecasts. Like firms that capitalized on opportunistic acquisitions following the 2007-09 Great Recession, companies that continue to raise capital and invest in M&A during this period of uncertainty will have a huge advantage over their competition.