Real estate M&A 2024 outlook

The real estate sector must adapt to a new environment, including higher capital costs, tighter lending standards, persistently high bid-ask spreads, and technological disruption

At the same time, themes of strategic alignment, transformation, and sustainability create optimism for an uptick in M&A activity in 2024. Dealmakers who can navigate uncertain conditions, show agility and creativity in structuring deals, and are well prepared will be able to create sustainable value. In this blog post, we share PwC’s latest insights into the trends of real estate M&A globally and in Switzerland.

Sebastian Zollinger

Director, Head Real Estate Advisory, PwC Switzerland

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The real estate industry is adjusting to higher financing costs, but the business environment is becoming more favourable due to progress on inflation and potential global interest rate cuts. This is expected to boost investor confidence and revive transaction activity in 2024. Real estate dealmakers will need to overcome challenges and show greater flexibility and creativity in structuring deals to improve asset performance amid rising capital costs. Uncertainties about election outcomes and geopolitical tensions may impact the pace of dealmaking in 2024, while megatrends such as demographic shifts, decarbonisation, and digitalisation are critical to portfolio strategies.

The fundamentals of most property sectors remain strong, with continued investor demand for quality assets. However, the US office sub-sector is facing demand uncertainties that are impacting risk and valuation perceptions across the sector. Pricing uncertainty is currently slowing down some transactions, but distressed deals are expected to continue, albeit at a lower level than during the 2008 financial crisis, due to differences in supply and leverage levels as well as lenders’ willingness to maintain sponsor relationships.

Global M&A trends in real estate Hot spots in 2024

Data centres

The rise of artificial intelligence (AI), led by generative AI technologies such as ChatGPT, and increasing data demand are driving significant growth for data centres. This once niche sector has gone mainstream, attracting investor interest from traditional assets such as office space and regional shopping centres to both large hyperscale and smaller edge data centres. A joint survey by PwC and the Urban Land Institute highlights data centres as a top investment prospect, second only to new energy infrastructure. Recent initiatives, such as Digital Realty’s joint venture with Blackstone to develop hyperscale data centres, underline the industry’s response to growing demand, with a particular focus on expansion in the Asia-Pacific region.

Healthcare-related real estate

We expect the demographic trend towards an ageing global population to have a significant impact on the healthcare-related real estate industry, driving demand for outpatient care facilities, medical office buildings (MOBs), and private healthcare clinics, particularly in the US and Europe. MOBs have attracted the interest of investors and developers due to their long-term leases, stable cash flows, and adaptable space, which offer greater stability than other commercial property sectors. Despite a slowdown in US MOB transaction volumes in 2023, the market remains robust, similar to the levels seen from 2018 to 2021. We expect the sector’s strong fundamentals to encourage future investment, as capital markets stabilise and the gap in price expectations between sellers and buyers continues to narrow.

Residential property

In Europe, the Americas, the Middle East, and Africa (EMEA), residential property is considered a mature asset class. In Asia Pacific, however, we expect it to be the most popular asset class in 2024. The recent growth in demand for residential assets, particularly multifamily, student, and senior housing, is driven by their lease structures which offer inflation protection – and largely fuelled by global institutional investors’ build-to-rent initiatives in search of stable, long-term income. Student accommodation also stands out, benefiting from government incentives and offering higher returns.

Real Estate deal volumes and values, 2020-2023*

Click the tabs to view the chart for each region.

*Real estate transactions included in the above chart include those in the office, industrial, retail, apartment, and hotels subsectors.
Source: MSCI Real Data Analytics

Global real estate transaction volumes and values fell by more than 40% in the first nine months of 2023 compared with the same period a year earlier. Among other headwinds, dealmakers faced rising interest rates and financing difficulties. The Americas experienced the largest decline in deal value, with a 56% drop, followed by EMEA at 54% and Asia Pacific at 31%. In terms of deal volume, EMEA saw the largest decrease at 54%, while the Americas and Asia Pacific saw decreases of 39% and 28% respectively. The decline in deal volume in Europe can be partly attributed to the region’s geographical proximity to two ongoing wars and macro-economic challenges.

“Although the Swiss real estate market has so far followed its own dynamics, future development is increasingly driven by exogenous factors. In addition to sustainability issues and technological developments, the Swiss market is exposed to international economic and political risks.”

Sebastian Zollinger,Director, Head Real Estate Advisory, PwC Switzerland

Real estate M&A: key themes to watch in 2024

Strategic adjustment

The challenging macroeconomic and political environment has tightened the availability of capital, with banks and insurers imposing stricter lending standards. This shift is driving some investors towards higher yielding assets and away from real estate. Expected interest rate cuts in 2024 could ease lending standards and improve access to credit. The reduction in traditional lending in North America and Europe is opening doors for private and alternative lenders. In Asia-Pacific, despite government-imposed capital constraints, the large (unleveraged) real estate holdings of wealthy investors mitigate the impact. Banks are now requiring more equity from borrowers, but equity is expected to become more accessible in 2024, driven by significant interest from Asian high-net-worth investors in European prime real estate. With plenty of equity to deploy and expected value corrections, we predict that investment volumes will increase in 2024.

Recalibrating expectations

In 2024, we expect to see an increase in opportunistic funds seeking to capitalise on distressed real estate. Property owners and operators are faced with the dilemma of holding on to underperforming assets until interest rates fall or selling now to avoid further losses. In the absence of an urgent incentive to sell, many owners are choosing not to sell, causing sales transactions to stall. This reluctance is keeping transaction levels low and bid-ask spreads wide. However, we expect transaction activity to resume as market expectations adjust.

Leveraging sustainability to create value

Environmental, social, and governance (ESG) factors are becoming increasingly important in global real estate investment decisions, according to PwC and the Urban Land Institute’s Emerging Trends in Real Estate Europe 2024 report. The focus on sustainability compliance is being driven by the collective demand from institutional investors, lenders, and tenants for compliance with global regulatory standards on climate, sustainability reporting, and energy efficiency. Real estate executives are prioritising sustainability not just as a regulatory obligation, but as a strategic means to create value, mitigate risk, and seize new opportunities.

Technological disruption

Technology, particularly generative AI, will transform the real estate value chain by improving data analysis and decision-making. Dealmakers will increasingly use AI for due diligence and business modelling, including assessing climate risks and sustainability efforts, such as monitoring HVAC systems and detecting water leaks. This integration aims to optimise the real estate value chain and efficiently address complex challenges.

2024 M&A outlook for real estate

The property industry is adjusting to a higher cost of capital environment, but the outlook for dealmakers is improving as inflation moderates and interest rates are expected to be cut. These developments will bolster investor confidence and stimulate property transactions in 2024. Success will depend on dealmakers’ ability to adapt to uncertainty and focus on value creation. In a cautious capital market, agility and innovative deal structuring – such as adding vendor earn-out provisions to bridge bid-ask spreads or vendor take-back mortgages to manage funding gaps – will be key advantages. Dealmakers who are well prepared will be best positioned to move quickly when the right opportunities arise.

What drives real estate M&A in Switzerland?

The Swiss real estate market has been relatively unscathed by global and European comparison. Due to immigration and a stable economy, the rental market has developed very positively. However, the willingness to pay for Swiss real estate, and thus the volume of transactions, has declined in 2023, resulting in negative overall returns for investment properties last year for the first time in more than 20 years, especially in the residential segment.

Record-high net immigration continues to put significant pressure on the Swiss rental housing market. The reference interest rate increased by 0.25 percentage points in both June and December 2023, allowing both new and existing rents to rise. The situation for new tenants is becoming increasingly challenging.

From a tenant perspective, the continued lack of construction activity in the housing sector is particularly frustrating, given the high demand for living space. Although production and construction costs have normalised significantly, no growth in the construction segment is expected for the next two years. This will increase pressure not only on rents but also on policymakers. The situation in the property market remains unchanged – the limited supply continues to push prices up.

In the commercial sector, regional differences with high fluctuations can be observed. A slight decline in office rents was observed in the fourth quarter of 2023, but nationally, office rents increased by 4.5% over the entire year. The German-speaking economic centres of Zurich and Basel were very robust, with change rates of +7.8% and +9.0%, respectively, while office rents in the Geneva region decreased by –4.9%.

M&A industry trends in Switzerland

Learn about the key trends driving M&A activity in Switzerland

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