2017 has brought a sharp increase in the level of corporate mergers and acquisitions, with global activity up by 10% in the first quarter, year on year, after four periods of decline.
Given the slowdown in real estate capital markets activity dating back to early 2016, I am starting to think that the uptick in M&A will be positive for property capital flows. The global economy is gaining pace quite rapidly, and positive sentiment flowing from GDP growth tends to drive transactional activity.
The following chart shows the quarterly value of corporate acquisitions and real estate capital flows.
The two series are highly correlated (.8), particularly over the last five years. There is more of an end-of-year spike in the real estate data, which probably reflects lower levels of liquidity in that asset class. It also appears that the fall in real estate activity was sharper than corporate activity in the financial crisis. Annual real estate capital flows fell by 67% between 2007 and 2009, whereas mergers and acquisition ‘only’ fell by 40%.
It is the last five years that is of greatest interest.
The drop off in activity that we have seen in real estate since the ‘peak’ in the second half of 2015 is almost exactly the same, in proportionate terms, as the drop off in corporate acquisitions. To me, this indicates that the same factors are operating in both market places. The decline in 2016 is due to the weakness in global GDP growth that set in, in late 2015, due to hawkish policy statements by the Fed and actual policy tightening by the Chinese. This weakness in global growth persisted all the way through to August 2016, and there has been a sharp improvement in worldwide economic activity since.
Statistical analysis suggests that M&A activity is highly correlated with real estate flows in the same period and real estate flows in the period after.
The contemporaneous correlation is pretty strong: so a good first quarter for M&A in 2017 bodes well for real estate flows in the first quarter. But, even if Q1 disappoints, the strength of Q1 M&A activity is positive for a Q2 pick up in real estate flows.
Currently there is a lively debate around the relative importance of ‘soft’ economic data from surveys and ‘hard’ economic data from government agencies. The soft data is much stronger than the hard data, leading some to question the strength of the global economic rebound.
The sharp increase in corporate transactions activity is strongly supportive of the recovery theme and bodes well for real estate capital flows in 2017!