In the first quarter of 2018, Global Mergers and Acquisition (M&A) was up by 51% on the first quarter of 2017. The total volume of activity, reported by Dealogic was US$1.2 trillion, up on US$792 billion from a year earlier.
Yesterday, Dealogic reported that the surge in activity had continued into the second quarter with volumes for the year now at US$1.7 trillion.
The chart below shows the relationship between real estate capital flows and global M&A activity. Both series are volatile and ‘lumpy’ with erratic seasonality. Nevertheless, the correlation between the series, confirmed by statistical analysis is quite clear (61% Q1 M&A vs. Q1 Real Estate Transactions). The jump in the volume of global real estate transactions in Q1 is less dramatic (1.3% vs. Q1 2017) on a global scale, but in the U.S., it marks a turnaround from a mild 5-quarter decline in activity. Birds of a feather fly together, as they say.
There are three reasons why the surge in global M&A activity suggests a strengthening of real estate capital markets activity over the coming years:
- The market environment is positive. The same factors that drive M&A activity: economic growth, abundant liquidity, surging corporate profits and robust business confidence, also drive real estate transactions. This includes purchases by investors but also leasing decisions by occupiers.
- M&A activity leads real estate transactions, according to regression analysis. There is a strong contemporaneous correlation between M&A activity and real estate, mentioned above. There is also a reasonably strong correlation between real estate transaction in the current period and M&A activity in the previous period (Lag 1). The current surge in M&A activity at a global level strongly suggests further growth in real estate transactions in Q2 2018. Momentum is building in both markets.
- Mergers, in the longer-term drive leasing activity. As companies integrate their activities, lines of business and support functions tend to co-locate. Some space is vacated, new more suitable premises are leased. Net absorption is unaffected because it is driven by overall employment growth, but gross absorption will go up.
The current surge in global M&A activity is very notable, particularly in a period of gently rising interest rates. On balance it bodes well for the level of real estate transactions.
By Richard Barkham, Global Chief Economist, CBRE.