The Specific Features of the M&A Process and the Importance of the Development Calculation for Investment Decisions
Recent years have been marked by significant disruption in the real estate sector. Following a prolonged period of low interest rates, rate levels have risen substantially, leading to higher financing costs while property sale prices have declined or at least ceased to increase further. At the same time, construction costs have increased significantly, further driving up the cost of development projects. These factors have resulted in a series of insolvencies among real estate developers and property development companies — most prominently the collapse of the Signa Group, which, in terms of liabilities, represents the largest insolvency case in Austria’s history.
Against this backdrop, Lukas Csokay, Senior Manager at Management Factory, provides an overview of the particular characteristics of M&A transactions in the real estate sector. He illustrates how sound investment decisions can be made and highlights the role of a robust development calculation in this process. Lukas Csokay currently serves on an interim basis as Head of M&A at an international construction group.
Specific Characteristics of Real Estate M&A Transactions
Real estate markets are inherently local and often fragmented. Demand is influenced by macroeconomic factors such as interest rates, employment levels, and demographic developments. However, local conditions also play a major role — in particular, the location of a property is one of the most decisive factors influencing demand and, consequently, price.
The high heterogeneity and comparatively low fungibility of real estate assets — compared to equities or bonds — lead to market inefficiencies. This can create opportunities for experienced investors who possess superior information.
Another defining feature is the strong reliance on debt financing and the resulting leverage effect. Real estate investments are typically financed to a large extent through debt, which can increase the return on equity. However, this also increases risk. The leverage effect is only beneficial if the return on total capital exceeds the cost of debt.
Investors pursue different objectives in real estate investments: recurring income from rental revenues, capital appreciation, inflation protection, diversification, tax advantages, and ultimately ownership of a tangible asset.
Direct real estate acquisitions — either through the purchase of a property itself or of a property-holding company — must be clearly distinguished from investments in Real Estate Investment Trusts (REITs) or Mortgage-Backed Securities (MBS).
Typical investors in direct real estate investments include:
- Real estate developers whose core business consists of developing properties and subsequently selling them.
- Institutional investors who acquire properties to generate ongoing rental income.
While developers generally have a shorter-term investment horizon, institutional investors typically pursue long-term strategies and often act as buyers of properties developed by developers.
Compared to “classic” M&A transactions such as the acquisition of industrial companies, real estate M&A transactions require particular attention to the following four aspects:
1. Asset Valuation
In corporate acquisitions, the focus lies on business models, earnings potential, synergies, and cash flows. In real estate transactions, the valuation of the physical asset and existing lease agreements (if any) is central. Due diligence encompasses not only financial analysis but also technical, legal, and environmental assessments.
2. Transaction Structure
Real estate M&A can be structured as an asset deal (direct acquisition of one or several properties) or as a share deal (acquisition of the property-holding entity). Tax and legal frameworks play a critical role. For example, amendments to the Austrian Real Estate Transfer Tax Act adopted in 2025 have significantly influenced transaction structuring.
3. Financing
The structuring of financing through equity, debt, and mezzanine capital is often more complex than in traditional corporate acquisitions.
4. Regulatory Environment
Real estate is frequently subject to local regulations, including tenancy law and building law. Environmental requirements, permits, zoning regulations, and similar factors must also be considered in the M&A process. Sustainability has become increasingly important in this context — not only due to regulatory requirements but also because investors now largely demand compliance with sustainability criteria, typically evidenced through certifications.
As in classic M&A transactions, the specific characteristics of each transaction object must be taken into account. The process of price determination, due diligence, and contract negotiations depends heavily on the type of transaction. Selling fully developed and fully leased properties to institutional investors differs significantly from investing in a development project without a finalized usage or commercialization concept.
The following section illustrates the criteria used to assess investment decisions in real estate development projects.
The Development Calculation as the Basis for a Sound Investment Decision
Whether in residential, commercial, or mixed-use developments, a typical real estate development project consists of several phases: from the initial project idea to planning, land acquisition, financing, construction, and commercialization.
As in any other M&A transaction, price determination is central to the investment decision. Although valuation approaches vary depending on the project phase, a robust development calculation serves as a key decision-making and valuation tool regardless of timing.
The development calculation can essentially be divided into two components:
Total Investment Costs (TIC)
This includes all costs necessary to construct the saleable property, typically categorized into:
- Land acquisition costs
- Planning costs
- Construction costs
- Financing costs
Planned Sales Proceeds
The expected revenue from selling the completed property to an end investor, such as an institutional investor.
If planned sales proceeds exceed total investment costs, the project appears economically viable. Additionally, the developer’s expected return (developer profit) must be considered if not already included in the total costs. It should also be assessed whether alternative investments — for example, a different usage concept for the same property — could generate a higher risk-adjusted return.
Depending on the project phase at entry, due diligence must assess how advanced negotiations are with service providers such as architects and construction companies. This allows for a more reliable evaluation of projected total investment costs and whether alternative bids or calculations should be obtained. Given the heterogeneity of real estate projects, generalized assumptions — such as average construction costs per square meter — may not be reliable.
Financing Considerations
Financing plays a decisive role in real estate projects and typically involves a significant share of debt. However, the leverage levels negotiable with banks have declined in recent years, and lending standards have tightened.
Key metrics include:
- Loan-to-Value (LTV) ratio: the loan amount relative to the market value.
- Loan-to-Cost (LTC) ratio: the loan amount relative to total investment costs.
As the project progresses and investment costs increase, both debt drawdowns and required equity contributions typically rise proportionally.
The more accurately financing conditions can be assessed, the more reliable total investment cost projections become. The intended financing term depends heavily on the timing of commercialization. Securing pre-sales in the form of a forward deal can significantly reduce financing costs, although such structures have become more challenging in the current market environment.
Commercialization and Exit Valuation
In a typical development project — for example, an office development — two parameters are crucial:
- Achievable future net rental income
- Target acquisition yield (capitalization rate)
The sales price is derived by capitalizing annual net rental income (after deducting maintenance, operating, and vacancy costs borne by the developer), comparable to calculating a terminal value in a DCF model in traditional M&A valuation.
Both parameters must be carefully analyzed and validated during due diligence, as even small changes — particularly in interest rates — can lead to significant valuation differences.
Market conditions are decisive in this context. In a low-interest environment, lower yields are acceptable, resulting in higher sales prices and developer profits. The recent shift in interest rates has significantly altered this dynamic. If property owners lack sufficient liquidity to withstand unfavorable market conditions and postpone an exit, a sale at a loss may become unavoidable.
Static vs. Dynamic Development Calculations
The development calculation represents the investment model or business plan of a real estate development.
It can be structured:
- As a static single-period model, or
- As a dynamic multi-period model.
While dynamic models are more complex, they allow for a more accurate allocation of cash flows over the project lifecycle and enable simulation of impacts on balance sheet, income statement, and cash flow. Nevertheless, static models remain predominant in practice.
External valuation reports are often available in real estate M&A transactions, particularly for IFRS fair value accounting purposes. However, investors should always conduct their own valuation analysis, using external reports for plausibility checks rather than relying solely on them.
Conclusion
M&A in the real estate sector requires in-depth knowledge of valuation methodologies, local market dynamics, and sector-specific risks. Compared to traditional M&A transactions, the valuation of the physical asset, financing structure, and regulatory considerations take center stage.
For investors, real estate offers attractive diversification and return opportunities but demands specialized expertise and thorough due diligence.
In classic M&A transactions, the business plan is central to purchase price determination. In real estate development, this role is fulfilled by the development calculation. A sound development calculation comprehensively captures all costs, revenues, opportunities, and risks associated with the project, thereby significantly facilitating investment decisions.
It is not only a valuable tool in M&A transactions but should also be applied in restructuring situations involving real estate developers and property developers. Like a corporate business plan, a robust development calculation enhances transparency and enables management to realistically assess property values and prepare an efficient restructuring strategy.