(Bojan Zepinic, Goran Zivkovic and Branislav Maric) A panel titled “Trends in the M&A Market and the Real Estate Market” was held in Belgrade on June 3. The participants were Bojan Zepinic, the leading partner at TPA Serbia, Goran Zivkovic, the director of CBS International, and Branislav Maric, a partner at the Kinstellar law office.
New trends in the M&A market, new models of these transactions, as well as which real estate classes were the “winners” and which the “losers” of the economic disturbances in 2020 and what can be expected in the market in the upcoming period were only some of the topics discussed.
M&A market and real estate market overview – COVID-19 impact
Regarding the real estate market in the light of last year’s events and the influence of the pandemic, it has turned out that the market is not that sensitive to external factors after all. Even with the oscillations in the first half of 2020, a recovery in all segments started as soon as last June and increased activities continued all the way up till the end of the year.
– After a temporary stagnation in March and April, the market of residential real estate saw a recovery, and the volume of the transactions reached the level from late 2019. A similar thing happened in retail real estate, with shopping malls being the most affected by restrictive measures, whereas, on the other hand, activities in retail parks, thanks to a different concept and architecture of the facilities, went as usual. The opening of new shopping malls, as well as the arrival of new brands shows a positive indicator of the further development of this segment of the market. When it comes to office space, last year was marked by the completion of the construction of 10 office buildings, whereby the offer was increased by an additional 100,000 m2, and due to the increased demand, the construction of nearly 250,000 m2 is expected by the end of 2022 – said Goran Zivkovic, the director of CBS International.
On the other hand, the offer of modern industrial space exceeded 2,000,000 m2 last year, which makes this segment one of the fastest growing segments in the real estate market in Serbia, thanks to which it remained fully immune and in the focus of investors even during the pandemic.
– As for the M&A market, we can’t not start by talking about the effects of COVID-19, which has marked the past 15 months and which will certainly continue influencing the upcoming period, though it is expected for the negative effects to go down slowly, but surely. As for the market trends when it comes to the structure or transaction models, there have been some changes that can probably be said to be caused by the pandemic. For example, an increase has been noted when it comes to liability caps, that is, the amount up to which the sellers oblige by contract to the purchasers regarding the guarantees for certain characteristics of the company they are selling. Also, the pandemic has made the agreeing of other so-called buyer friendly stipulations slightly simpler in practice – pointed out Branislav Maric, a partner at the Kinstellar law office.
Bojan Zepinic, the leading partner at TPA Serbia, said that, in the first half of 2020, M&A activities in Serbia nearly died out, due to both the physical impossibility of having potential purchasers and sellers negotiating and agreeing the transactions and the global uncertainty that was present in that period. Also, in some transactions that had already been signed, a renegotiation of certain terms and amendments to the initially signed agreements took place.
In the second half of 2020, there’s already more M&A activity and there are some new trends as a consequence of the new circumstances. In general, in industries that were resilient to the challenges of the COVID-19 pandemic (or which grew last year, like online trade, IT/ICT sector, pharmacy), no big changes were recorded. It is still the M&A market where the sellers dictate the conditions and where valuation is still relatively high.
On the other hand, in industries whose financial performances are worse than before or which are yet to experience challenges regarding sustainability due to COVID-19, the valuation is slightly lower, the sales and purchase prices are paid in more installments and there are other terms of sales and purchase of companies that are unfavorable for the sellers.
What are the projections for the next period?
Although Belgrade reached its millionth square meter of office space at the end of 2020, this market segment is still undeveloped compared to the region, because the offer of Belgrade is 50% lower than the total offer of Zagreb with its 1.5 million square meters and a million residents fewer. Also, the offer is lower than a third of what Budapest, Prague and Bucharest have to offer, because those cities have over 3 million square meters of modern office space. Our market has remarkable potential for investors and this is where we are perhaps ahead of the region, which is also shown by the fact that, aside from the two newly built shopping centers in 2020, Belgrade still has far less modern shopping space per 1,000 residents than Zagreb, which has nearly double to its considerably lower population.
When it comes to the residential segment of the market, it is still the central focus of both the local and the international investors, with the same intensity of construction, even during last year. This is also shown by the fact that the demand in the first quarter was increased and the number of apartments was 15.2% higher compared to the same period last year.
The further perspective of the M&A market in Serbia will depend on certain global and local trends. An increase in transaction activities is expected, which has been slightly on the rise since the beginning of the current year, especially in the segment of small and medium transactions. As for the sectors, it is believed that IT and food industry will continue being among the most interesting ones. Also, there’s plenty of interest in the field of energy, and it is to be expected for the consolidation in banking and insurance to continue as well.
As for the local framework, there are two key challenges:
– The readiness and the capacity of local companies to adequately prepare for the M&A process (whether as the seller or the buyer), and
– Further connecting and economic consolidation of the Western Balkans, because the current economic division of small local economies is not suitable for a higher scope of M&A activities which involve big global players.
If these two key challenges are met successfully, the assumption is that M&A activities in Serbia will grow considerably in the next few years.