Rising interest rates to stop potential M&A deals

Hybrid work, technology, big data disruptions drive changes to the real estate industry. 

Challenges linger in the real estate sector with interest rates increasing at a rapid rate, causing potential M&A transactions to a halt.

Seng-Leong Teh, Global Real Estate Hospitality & Construction M&A Leader at EY, said that the last 10 years have been the ‘golden years’ of real estate due to mega trends which drive the industry today.

“You can see that in the past, real estate, especially in retail, is also going through a point of reckoning,” he said, “Now, interest rate is changing at the other direction, at a very rapid rate, which makes it very difficult for M&A or real estate M&A to happen, you know, as per usual, but again, in any disruptions, there's always opportunity.”

Seng-Leong mentioned that real estate will see a lot of stress in the next two years due to the interest rate and heavy work, but there is still an opportunity in securing transactions.

“Even though transactions in terms of volume have come down, we're seeing transactions, especially on the stress side, where there are distress opportunities,” he added, “I think the underwriting criteria, assessment now is a lot tougher because the market liquidity is no longer as easy as before.”

Seng-Leong explained that real estate is no longer about return of equity, but written off-equity, considering the turbulence in the market. He advised investors to be cautious as federal interest rates remain unstable.

“I would say the reason to invest now is about making sure that you're clear as to where you're going to continue to come from because it is very risky to do speculative build, even in hot markets,” he explained, “I mean, we can see some of these experiences, especially on the digital real estate side.”

Moreover, Seng-Leong emphasized that property technology offers a deep understanding of demographics and visitor traffic, allowing for a more strategic tenant mix. For commercial real estate, innovations are focused on building smart and efficient structures, with ESG considerations taking center stage.

“And these are I would say naturally good for landlords for owners, because before they venture and start investing into new buildings, new asset classes, they have all this consideration as part of part and parcel of the contracts evaluation,” he ended.