Mega-deals are on the rise around the world, says William Matthews – and private capital is fuelling the growth
Few purchases come with a billion-dollar price tag, even in the world of real estate.
As recently as the previous decade, just a handful of buildings breached this threshold each year, the majority of them offices in Manhattan, bought by institutional investors and property companies.
The market for these mega-deals is changing rapidly, however. The past five years have seen the total value of US$1 billion-plus transactions jump from US$5 billion in 2012 to over US$20 billion in 2017. Asia has emerged as the predominant source of demand, accounting for just under two-thirds of purchases by volume.
The type of investor has been evolving, too. While just a few years ago no private capital was involved in any US$1 billion-plus purchase, private investors were behind three such deals in 2017. In fact, thanks to the US$5 billion purchase of The Center office building in Hong Kong by a consortium of domestic investors, private capital backed almost 40% of megadeals by value in 2017.
For those with the means, the allure of investment at this scale is clear. Typically, buildings that can command such a high price are landmarks, defined by world-class architecture or instantly recognisable silhouettes, and famous in their own right. Purchasers of such buildings gain instant global recognition as “serious” investors, and can potentially use this to enjoy preferential access to further deals.
There are also practical reasons for considering very large lot sizes. Commercial real estate transactions take time and energy, potentially making a single large purchase more efficient than a number of smaller ones. A larger scale also provides interesting asset management opportunities.
And, while many trophy buildings are bought as part of a long-term holding strategy, their status is such that when the time comes to sell there is likely to be a waiting list of eager bidders.
Above the billion-dollar threshold, most transactions involve office buildings. While the source of demand of these offices is increasingly global, the drivers behind pricing are most certainly rooted in local markets. Simply put, a billion dollars will buy a lot more in some markets than it does in others, and we use the Knight Frank Skyscraper Index to monitor the extent of this gulf.
The analysis reveals one reason why even investors with some of the largest budgets, including those from Hong Kong or Singapore, may be looking to invest beyond their domestic markets in comparably less expensive locations such as London. Broadening the criteria to include deals worth US$500 million-plus, a somewhat different picturevstarts to emerge.
The same overall trend of rising investment is evident, with purchases growing from US$21 billion in 2012 to US$53 billion in 2017, but the mix of assets is broader, featuring shopping centres, hotels and industrial facilities. Regardless of pricing, single-asset transactions are not the only way for private investors to gain large-scale exposure to commercial real estate.
Platform deals – in which purchasers buy the operational business as well as the underlying real estate – are proving increasingly popular with a wide range of investor types seeking to deploy capital quickly. Such deals represent an alternative way to make acquisitions of scale.
They also come with the advantage of a management team in place to look after day-to-day operations, which can be especially helpful when entering unfamiliar markets.
Although traditionally the preserve of sovereignvwealth funds, private equity and institutional investors, some private investors also appear tovbe following this path. For example, in 2017 it emerged that Hong Kong investor Samuel Tak Lee, whose portfolio includes the 14-acre Langham Estate in central London, had increased his share of Shaftesbury, a real estate business listed on the London stock exchange, prompting speculation regarding a possible takeover bid.
For those private investors willing to take a more hands-on approach, there is no reason to be constrained by the availability of existing platforms. Creating new portfolios of prime assets is one route that has proved attractive to family offices globally.
The rise of Pontegadea Real Estate, a multi-billion-dollar portfolio assembled by Inditex owner Amancio Ortega, shows that this can be done with speed and at scale.
We predict that the volume of US$1 billion-plus and US$500 million-plus deals – single buildings or portfolios – will continue to grow as the real estate asset class matures globally and investors, ranging from institutions to sovereign wealth funds, gradually ratchet up allocations.
Yet even with the current pace of growth, it would be a stretch to characterise this tier of the market as truly liquid.
And therein lies the opportunity for private investors: free of the timing constraints of commercial rivals, their patient capital can wait for the right opportunities to acquire some of the world’s best real estate.
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