“Trends in the M&A and Real Estate Market” panel discussion was held in Belgrade on 3rd June. The panelists were Mr Bojan Žepinić, the Managing Partner of TPA Serbia, Mr Goran Živković, the CEO of CBS International and Mr Branislav Marić, a Partner in the law firm Kinstellar Belgrade.
The new trends in the M&A market, new models of these transactions, as well as which classes of real estate were “winners” and which were “losers” of economic shocks in 2020 , but also what can be expected in the market in the coming period, were some of the topics that we discussed In the event.
Overview of M&A market and real estate market – the impact of Covid-19
When we talk about the real estate market in the light of last year’s events and the impact of the pandemic, it turned out that the market is not so sensitive to external influences. Despite the oscillations in the first half of 2020, a recovery began in all segments in June, while intensified activities were continued until the end of the year.
“After a temporary stagnation in March and April last year, the residential real estate market recorded a recovery, and the volume of transactions reached the level from the end of 2019. The situation was similar in the case of retail real estate, where shopping malls were more affected by restrictive measures, while on the other hand, activities in retail parks, thanks to a different concept and architectural solutions of the facilities themselves, were normal. The opening of new shopping malls as well as the arrival of new brands, shows a positive indicator of further development of this market segment. When it comes to office spaces, last year marked the completion of the construction of 10 office buildings, which increased the supply by an additional 100,000 m2, and due to an increased demand, construction of almost 250,000 m2 is expected by the end of 2022”, said Goran ŽivkoviĆ, the CEO of CBS International.
On the other hand, the offer of modern industrial space last year exceeded 2,000,000 m2, which makes this segment one of the fastest growing segments on the real estate market in Serbia, thanks to which it remained fully in the focus of investors during the pandemic.
“When we talk about the M&A market, we can start from the effect of COVID-19, which marked the last 15 months and which is sure to continue affecting the coming period, with gradual, but sure reduction of negative effects. When it comes to market trends and its structure or models of transactions, there have been some shifts probably caused by the pandemic. For example, increases have been visible in terms of liability caps, which means the amounts to which the sellers are contractually obligated to the buyers in the given guarantees regarding certain characteristics of the company they are selling. Also, the pandemic made contract processes simple in other so-called buyer friendly provisions “, pointed out Branislav Marić, a Partner in the law firm Kinstellar Belgrade.
Bojan Žepinić, Managing Partner of TPA Serbia, said that in the first half of 2020 M&A activities in Serbia had almost died out, both due to the physical inability of potential buyers and sellers negotiating transactions, as well as due to the global economic uncertainty that existed at the time. Also, in some transactions that had already been signed, certain conditions were renegotiated.
Already in the second half of 2020, there is more M&A activity and some new trends as a result of new circumstances. In general, some major deviations were not observed in industries that were resistant to the challenges posed by the COVID-19 pandemic (or that had growth last year, e.g. online commerce, IT / ICT sector, pharmacy). We still have M&A market where sellers dictate the terms and where valuations are still relatively high.
On the other hand, in industries with financial performance worse than in previous years or which, due to the COVID-19 pandemic, are still waiting for challenges related to business sustainability, we detect slightly lower valuations, payments of purchase prices through a number of installments and other conditions of sale unfavorable for sellers.
What are the projections for the future?
Although Belgrade reached one million square meters of office space at the end of 2020, this market segment is still underdeveloped compared to the region, because Belgrade’s offer is 50% lower than the total offer of Zagreb with its 1.5 million square meters and one million inhabitants less.
Also, the offer is less than a third in comparison with Budapest, Prague or Bucharest, because those cities have more than 3 million modern office space on offer. Our market has great potential for investors and, perhaps, we are ahead of the region in that. This is confirmed by the fact that in addition to the two newly built shopping malls last year, Belgrade still has significantly fewer square meters of modern shopping space per 1,000 inhabitants compared to Zagreb that has significantly smaller population and almost twice as squares of modern shopping centers.
When it comes to the housing segment of the market, it is still the central focus of both domestic and international investors with an undiminished intensity of construction even during the past year. This is supported by the fact that demand increased in the first quarter and the number of apartments sold was as much as 15.2% higher compared to the same period last year.
Further perspective of the M&A market in Serbia will depend on certain global and local trends. Transaction activity is expected to increase, which has been in a certain momentum since the beginning of the current year, and especially in the segment of small and medium-sized transactions. It is considered that IT and food industry will continue to be among the most interesting. Also, there is a lot of interest in the field of energy, and it is expected that consolidation will continue in the field of banking and insurance.
As for the local framework, there are two key challenges:
- The willingness and capacity of the local company to adequately prepare for the M&A process (either as buyers and sellers), and
- Further networking and economic consolidation of the Western Balkans, as the current economic fragmentation of small local economies is not eligible for a larger volume of M&A activities involving major world players.
If these two key challenges are successfully addressed, the assumption is that M&A activities in Serbia will grow significantly in the next few years.