Craig Martin
Deal Advisory Partner - Transaction Services
On the face of it, the statistics point to a challenging year for UK Real Estate M&A. 2024 saw the lowest transaction volumes and the highest number of deals aborted aborts in over a decade. Persistently high inflation and interest rates have driven liquidity constraints, with debt and equity hard to come by for all but the largest institutional investors. The capital markets have continued to be challenging, with net redemptions of capital, and most real estate company share prices trading at a discount to their net asset values. Global wars and political change have also added to the economic uncertainty.
That said, on closer inspection, there is reason for optimism and the market statistics have gradually improved over the course of the year. Over the last three to six months, we have seen a clear uptick in deal activity, firstly a surge ahead of the UK Autumn Budget - with investors looking to sell ahead of impending Capital Gains Tax (CGT) increases - and more recently due to improved market sentiment (more on this below).
Lately, most UK real estate investment has gravitated towards operational real estate asset classes and developments – including Retail, Residential, PBSA, Hotels and Self-Storage - which have offered more opportunity for higher returns and yield compression for investors who are able to bear the associated risk. Opportunistic investors have also been active across asset classes that they believe reached the bottom of the cycle, particularly in the latter half of 2024.
While Logistics investment is back on the rise - with Amazon more bullish on the back of online sales growth and storage capacity at a premium given global supply chain challenges - investment in “core” asset classes, especially offices, has generally remained subdued, with demand mainly focused on the highest quality, low EPC-rated, prime commercial property.
On the UK capital markets, take-privates and listed REIT mergers have been a key feature, with stronger institutions using a mixture of balance sheets and shares to consolidate and achieve scale. We expect this trend to continue into 2025.
Despite the challenging conditions, 2024 has been incredibly successful for the BDO Deals Advisory team, and we are proud to share that our Real Estate sector team has had a record year.
We remain the market leader for listed real estate transactions, and supported clients on three of the largest listed REIT mergers of the year:
While there is naturally still uncertainty in the deals market, we are cautiously optimistic for 2025. Inflation – while expected to continue to rise slightly – appears to be relatively stable, and debt is now generally accretive (albeit only just) to transaction yields with interest rates lower and expected to fall further over the course of the year. While the Autumn Budget appeared to slightly stifle expectations of UK economic growth, inflation and interest rates, investors can at least make strategic decisions with a little more certainty.
The fundamentals for occupiers have largely remained strong with rents generally improving across the spectrum of real estate asset classes. Even retail appears to have substantially weathered the storm, which has been reflected in improved yields and deal volumes.
Refinancing events have been a key driver of deal activity the last 18-24 months, and we expect this to continue into 2025, albeit (hopefully) with improved liquidity and lower interest rates making transactions easier for investors.
Falling interest rates over time should also lead a gradual return to investment in “core” asset classes, a trend which is supported by our pipeline and client conversations, and we are generally seeing more interest in transactions from a broader range of investors (private, listed, funds, PE and overseas, especially from the US).
In residential, the continued worsening of the supply/ demand imbalance and ongoing pressure around affordability are likely to result in modern PRS assets attracting strong interest from long term investors, as high levels of occupancy and an attractive outlook for rental growth make for a compelling investment opportunity.
Recent (and proposed) capital markets reforms - geared towards making it easier to IPO, raise capital and execute deals on the UK markets – could also see improved sentiment for listed real estate, albeit it may be a while before we see REIT IPOs return in any significant numbers. For the moment, the listed real estate market still appears to be in consolidation mode, with small-cap REITs also a target for take-private bids.
