A BUMPER year is on the cards for mergers and acquisitions in Asia's key markets. We haven't seen anything like the activity we expected in 2020 and that will change this year.

We know why asset transactions are limited. The prime assets are overpriced due to the amount of money chasing them and the stressed ones haven't fallen far enough to be a safe bet.

In the meantime, there is global interest in the Asia-Pacific and a lot of people raising funds to invest here. There's a perception that most countries in Asia-Pacific have done better than the rest of the world with Covid-19. The fundamentals are still very good. So a lot of investors are fully funded and looking for sound investments.

That's where the pressure is building for larger real estate investment trusts (Reits) with global appeal, for assembling more dominant corporates and for funding Asia's entrepreneurs to delist and create the more agile private businesses that can respond to new realities post-pandemic.

With this, expect to see Singaporean and Japanese Reits merging within their domestic markets. We haven't yet reached the point where cross-border Reit mergers are the right play, but both countries have a critical mass of Reits to support consolidation and that's especially likely in Singapore where some Reits have similar sponsors.

The driver for consolidation is simply the need to be larger. Greater gravity draws more funds to make more acquisitions and ultimately generate better returns.

A NEWSLETTER FOR YOU

Tuesday, 12 pm

Property Insights

Get an exclusive analysis of real estate and property news in Singapore and beyond.

Sign Up

Competition between Reits makes consolidation inevitable among the smaller players. Larger Reits trade more often because they have a higher free float. They attract more analyst coverage and are better able to find assets to buy offshore in markets like Australia, with its relatively high cap rates.

Consolidation also brings the scale needed for a place on global benchmarks, such as in the increasingly important area of environmental, social, and governance indices.

Real estate investors around the globe are scrutinising the carbon emissions and climate resilience of assets and of wider markets too. It is quickly moving beyond best practice to something required by regulators.

Most of 2021's M&As activity will be between Reits. We are unlikely to see real estate developers merging and acquiring each other, but look out for acquisition of companies within the chain, particularly tech companies trying to buy those that complement the main business.

The obvious example is tech companies buying retailers for a physical presence, but the proptech space is generally ripe for consolidation. We will see proptech companies buying real estate companies and, to a lesser extent, real estate companies buying proptech.

These are different types of businesses but they bring more parts of the chain together, affording control over a key technology and, perhaps, cutting off future competition.

There will be some activity in the other direction, especially in China, where there is currently an incentive for real estate companies to spin off their specialist subsidiaries.

Expect to see Chinese developers separating their profitable property management arms in response to government pressure to deleverage and to feed emerging demand from a new breed of asset managers for property management expertise.

When it comes to corporate privatisations in the region, it's a different set of drivers. Where the share price has sunk and the asset values haven't, there's an opportunity for the entrepreneur or the family to buy the company back at a discount to net asset value.

This is so common in the Asia region when the markets get tough. Property companies in Asia-Pacific often trade at a discount to net asset value. It's particularly obvious in Hong Kong, but not confined there. So there's always that margin. The margin is pronounced at the moment.

Sentimental stock markets reacted very quickly to economic uncertainty, but asset prices have held up pretty well in Asia-Pacific, despite uncertainty, because there's so much money chasing too few assets. The current wave of privatisations is taking advantage of the price disparity.

It's easy when there's a large shareholder. When they already have the majority of shares, they only have to buy back a relatively small percentage of the company to take it private.

The majority shareholder has the comfort of putting money into a known quantity and gives itself greater flexibility to navigate the new normal.

The added incentive in tough markets is the opportunity to recapitalise the company. That restructuring is also a good move where a listed company is not performing very well as a company for other reasons.

That's not to say the price disparity won't shift this year. The annual survey of the sector by ULI and PwC reported widespread expectations of a price correction in asset prices in 2021. Real estate owners who have been holding on to assets until Covid-19 disappears and life gets back to normal are conscious that the pandemic could be with us for longer than they hoped. They are starting to feel the inclination to trade and that increase in transactions will bring asset prices down.

One recent article in The Business Times described the current wave of restructurings as "a bet on a return to normalcy".

My own view is that the real estate sector is preparing itself for a very different world, where the acceleration of trends we have seen in the past year is going to leave us far more reliant on technology and some sectors of real estate transformed.

• The writer is president of ULI Asia-Pacific