Propco deal activity has been as muted as opco in 2023
We’ve written a lot about the slowdown in M&A activity over the past year or two. But rising interest rates haven’t only adversely impacted opco acquisitions. They’ve had a similarly negative impact on propco investment.
Higher interest rates makes debt-financing much more expensive, and consequently using debt-leverage becomes much less viable. Smaller deals which can be done on an all-equity basis are still possible for those that have the cash, but the larger ones which require significant amounts of debt have become much more difficult.
This is as true for health care real estate investors as it is for those investing in health care operators. Whilst real estate investors can still borrow at much lower rates than operators and those investing in operators (because real estate is an inherently less risky investment), the borrowing rates they face have also gone up.
Stephane Pichon of French consultancy Your Care Consult tells us that were it not for one giant deal – French REIT Primonial’s acquisition of its rival Icade’s entire health care real estate portfolio – deal value for 2023 would have dropped around 70%. Pichon says there’s usually about €10bn worth of health care real estate investment activity across Europe each year, and that the figure for 2023 will be roughly the same, but the Primonial/Icade deal accounts for seven of 2023’s ten billion!
Even more worrying is that newbuilds have mostly stopped in most of Western Europe, because construction and debt costs have risen sharply whilst valuations are seeing downward pressure. This means that in most cases there is little to no return on investment for developers.
For existing buildings, which form the bulk of real estate investment activity, there is still a mis-match between buyer and seller price expectations (as with opco). Real estate valuations have fallen, but not by enough from the perspective of potential buyers.
Sophie Cooper, associate at CBRE, a real estate advisor, tells us that market conditions mean that real estate investment is simply not accretive currently. “There are still some buyers who are more opportunistic and want to buy distressed stock, but not much is happening yet. I think we’re expecting volumes to return at the end of next year or the beginning of 2025.”
We would welcome your thoughts on this story. Email your views to Martin De Benito Gellner or call 0207 183 3779.
