After the unique events of last year, 2021 has broken new records for consolidation in listed real estate markets. With a quarter of the year remaining, European M&A volumes have already surpassed the previous record in 2018 and are up nearly 30% on 2020 which was the next busiest year. It is a similar picture across the Atlantic where US volumes have already reached $50bn and are on track to come close to 2018's record.
Consolidation driven by demand and supply factors
The bonanza has been fuelled by asset managers and private equity firms flush with cash attracted to cheap valuations, particularly in the segments and geographies hardest hit by the pandemic. The deals have generally been driven by buyers seeking financial synergies rather than distressed sellers and so most have been willing to pay premium prices.
In the US, surging demand that was pent-up during lockdown has been met by increased supply as sellers look to complete deals before higher taxes threaten to squeeze future profit margins. The changing face of real estate means there is particularly strong appetite for buildings in new segments like Infrastructure and Data Centres with the US data centre market expected to grow by 13.8% percent in 2021 according to CBRE[1].
Public and private market dynamics
2021 has also seen strong demand from both public and private market buyers for attractive assets. Public to private deals have represented around a third (30%) of US deals by value this year, up from a quarter in 2020. The market dislocation caused by the pandemic means that depressed sectors such as retail and hospitality still trade at steep discounts, creating openings for opportunistic private market buyers.
Meanwhile, strong share price performance for recovering REIT segments this year means that they have additional currency to consolidate or diversify. The largest deal of 2021 so far saw Realty Income acquire VAREIT in an all-share transaction to create one of the largest ever REITs with a combined enterprise value of $50 billion.
Deal dividends for unitholders
For several years M&A has been included by SKAGEN m2 as one of its core portfolio themes driving long-term structural change in real estate markets and a source of attractive rewards for unit holders. In 2021 six holdings have been involved in consolidation so far, delivering good financial returns that have been reinvested into new ideas.
A good example is Adapteo, the Swedish flexible real estate provider which was acquired by a Goldman Sachs infrastructure fund in May. The €798 million bid was at a 53% premium to the company' share price; Adapteo is M2's best performer this year, contributing over 3% to the fund's absolute returns.
Other holdings we have sold at attractive bid prices include Deutsche Wohnen* – taken over by compatriot Vonovia; CA Immo* – the Austrian office and residential operator bought by Starwood Capital; and Columbia Property Trust* – the US office operator being bought by PIMCO for $2.2bn. The latter represents a 17% premium and means Columbia is among SKAGEN m2's top ten contributors for 2021.
Two holdings involved in M&A activity remain in the portfolio. Hong Kong-based ESR Cayman (3.2% of NAV) is acquiring ARA Asset management for $5.2bn to create the largest property manager in Asia Pacific with combined assets of $129bn. Also in Asia, the development arm of CapitaLand (3.0% of NAV) is being taken over by sovereign wealth fund Temasek in a deal that will see the Singaporean company transformed into one of the largest real estate investment managers globally. CapitaLand 's re-rating – the valuation has gone from a steep discount to a premium to NAV – means it also among m2's ten best performers for unitholders this year.
Finally, our holding Health Care Trust of America was recently approached by activist giant Elliot Investment management, which has built a stake in the company and is looking to launch a strategic overview that includes a potential sale. In August the same activist investor took a position in another portfolio company, Switch Inc, and has a track-record of creating shareholder value.
Portfolio positioned for further spoils
While it is always difficult to identify individual takeover targets for investment, it is possible to tilt the probability of M&A rewards in your favor. First, SKAGEN m2 is 74% invested in small and mid-cap companies which are logically easier to take-over than large-cap stocks for strategic, financial and regulatory reasons.
Second, the portfolio is diversified across a range of segments with good exposure to those containing attractive takeover targets such as self-storage, logistics / warehouses, data centres and offices. Third, SKAGEN m2 is also overweight companies outside of the US where valuations are relatively less attractive thanks to the momentum of the broader stock market.
The key factor is valuation and the SKAGEN m2 portfolio trades at a healthy discount to the index on both a book value (-20%) and earnings (-38%) basis. With public and private companies expected to continue their spending spree on listed real estate assets, we are confident that the attractions of our holdings mean they will be part of the changing property landscape while delivering good profits for unitholders along the way.
* Pending completion and not yet finalised / delisted
NB: All portfolio data as at 30/09/21 unless stated
Footnotes:
[1] Source: CBRE US Real Estate Market Outlook