Is your real estate strategy ready for an uptick in M&A?

Against a deteriorating macro-economic backdrop of political instability, high inflation, declining consumer confidence, and rising borrowing costs, M&A deal volumes in the UK have shrunk to pre-pandemic levels in 2022.

Might we see a rebound in the remainder of 2023?
 
PwC’s head of deals, Lucy Stapleton has argued a combination of stabilising interest rates and ‘increased certainty’ could kickstart a spate of big-ticket M&A activity as private equity funds seek to deploy their stores of ‘dry powder’.¹  

Early market indicators suggest a resurgent corporate appetite for M&A dealmaking in the second half of 2023 to support corporate strategic objectives. For example, revamping business models or upgrading operational capabilities in response to rapidly advancing digital transformation, changing consumer expectations and pursuit of net zero goals. PwC’s 26th Annual CEO Survey found 63% of UK CEOs plan to proceed with intended deals in the next 12 months, while a recent CBRE survey found 41% of our largest UK Occupier clients anticipate M&A or divestment activity within the next 12 to 18 months.

Given these early indicators, if you are a Corporate Real Estate (CRE) leader, now is the time to be asking if you have everything in place from a real estate standpoint, to support an increase in M&A activity?

Real estate is often overlooked but there is significant opportunity and risk mitigation available if it is given the correct importance. It’s key to consider that your real estate:

• Comprises a substantial proportion of corporate balance sheets and therefore represents an opportunity to optimise cost
• Is considered too late in the M&A process. Early engagement and consideration can ensure targets to meet from both a time and value perspective
• Can be cause for huge business disruption impacting your staff and their effectiveness, health and wellbeing

M&A preparation can be a daunting undertaking for corporate real estate leaders.  From navigating changes in occupancy and lease terms to portfolio integration and optimising costs.
  
A few of the challenges that we often see are:

The cost of not acknowledging real estate

Failure to acknowledge real estate early in the decision-making process can lead to suboptimal outcomes, wasted resources, and missed opportunities. A common example of this is the financial value of an asset being over-stated relative to market value, leading to expensive write-offs further down the line.  Something else we see often is unrealistic synergy saving targets being set for real estate at a desktop level, without market testing. These risks can be easily mitigated through a simple process of due diligence as long as corporate real estate teams are engaged early enough in the process. To avoid this, CRE leaders must be ready to make the case to senior stakeholders being clear about the benefits and opportunities of understanding the real estate landscape pre-deal and, highlighting the risk of not. 
 
Real estate data is often incomplete

Our clients tell us that data availability is the number one challenge they face during M&A. This is the root-cause of many real estate challenges post-deal, so clients need to be proactive. Being prepared with good data management processes and systems that can be easily extended to acquired portfolios is key. Have the right skills and capabilities in your team or on-hand to process, clean and interpret data quickly. And where you identify gaps, ensure you have easy access to market expertise to provide reasoned assumptions.  
 
Think holistically and determine the true potential of a combined real estate footprint

M&A, like any business change, presents the opportunity for real estate to impact and improve business performance in a range of ways beyond the cost of bricks and mortar. Through involvement in M&A decision making, corporate real estate leaders can influence strategies that:

• improve access to talent, supporting growth through informed location selection
• accelerate cultural integration by creating the right working environment to build connections and community, and
• eliminate inefficiencies that often are created in supply chains by legacy warehousing volumes and location 

Corporate mergers and acquisitions can be complex, time-consuming, and often involve a great deal of uncertainty. Real estate is a crucial part of M&A, and without proper guidance, the process can be even more challenging.  

The key questions you should be considering are:

• Do you have a clear view of the role real estate will play in enabling integration / separation – cultural, business and financial?
• Do you know the value and risks associated with incoming / divested real estate assets, business processes, operating models, and organisational structures?
• Do you have market-tested real estate cost savings and value release targets that you know you can action?
• Do you have adequate capacity within your real estate team to realise value quickly whilst continuing to service delivery targets?

If your business is planning for or undergoing merger, acquisition or divestment activity, please get in touch to see where we can help. 

¹https://www.cityam.com/bank-dealmaking-slumped-to-a-five-year-low-in-2022-will-it-rebound-this-year/