The first quarter of 2019 experienced lower deal volume given financial market volatility, the government shutdown and a number of other externalities ( similar to the first quarter of 2018).
Nonetheless, the data suggests that the backdrop is set for deal volumes to accelerate economic and operating fundamentals remain stable, available capital continues to grow (particularly when factoring in shadow capital from technology firms as an example), and geopolitical and policy risks continue to recede. The operating environment is not without risk and we remain focused on any weakness that could be caused by matters such as global rent control and technology sector underperformance.
Key trends and highlights
Deal value and deal volume declined in the first quarter of 2019, as compared to both the first and fourth quarters of 2018. We believe this decline is indicative primarily of the impact of several external factors driving investor uncertainty, including the US government shutdown, global political tensions, ongoing US-China trade negotiations, and interest rate volatility. Given the Federal Reserve’s recent vote to be patient with further interest rate adjustments, combined with stable operating fundamentals and an extended real estate cycle, we expect transaction volume to grow over the balance of the year.
REITs have experienced strong equity price appreciation, being up roughly 12% year to date according to the FTSE indices. Across all core sectors, discounts to net asset value (“NAV”) have declined, and several alternative sectors are trading at a healthy premium to NAV. This has contributed to an increase in equity capital raising for REITs and may impact the volume of public-to-public M&A activity.
Q1 2019 marked another strong quarter of global proptech funding, with the largest announced transaction (Softbank Group’s $6.0 billion follow-on acquisition of a minority stake in The We Company) exemplifying the increasing quantum of capital being allocated to the intersection of technology and real estate.