Dubai: Individual property sales activity may still be subdued across the region, but that's certainly not the case when it comes to mega deals. Days after the announcement that Gulf Finance House was selling a stake in Bahrain Financial Harbour, Dubai-based Essdar Capital has acquired the financially ailing Blue City master development in Oman.

One can expect a lot more of mergers and acquisitions in the region's real estate space going forward. But those pursuing such deals better be selective about it.

"For players purely seeking local growth, asset acquisition from distressed developers may make more sense than corporate M&A (mergers and acquisitions) but to become a leading regional or international player now is as good a time as any to consider M&As as part of the strategy," said Olivier Laroche, manager of the real estate practice at the specialist consultancy A.T. Kearney's regional office.

"Clearly, M&A is not the right strategy for all real estate players in the region."

According to the firm, it is inevitable the fragmented real estate industry will need to become more concentrated to secure long-term competitiveness. In comparable markets internationally, A.T. Kearney has found that the biggest developers represent more than 70 per cent of the market, whereas in the Middle East clear regional champions are yet to emerge.

For instance, in Singapore, which has a quite mature real estate sector, has seen consolidation plays increase over the past decade. One company, CapitaLand, has been a driving force by executing 11 major acquisitions between 2002 and 2009.

"Winning companies in the Middle East will be those that are well positioned to take advantage of M&A opportunities in light of a broader growth strategy," said Dan Starta, managing director and partner, A.T. Kearney Middle East. "It's a buyer's market, and companies that act now are likely to emerge as winners when the upswing arrives."

The company's research has found that several GCC developers might be well placed to take advantage of the current situation. The analysis identifies several listed developers that seem well placed to make some aggressive moves, Emaar and to a lesser extent Deyaar and Sorouh are among those from the UAE. Within the MENA territory, Saudi Arabia's Dar Al Arkan and Al Akaria, Qatari-based Ezdan Real Estate, Kuwait's Al Mazaya, and Morocco-based CGI are the ones to watch out for.

"It is a buyer's market and those developers who manage to pick up the right deals and realise the full business potential from these deals will change the game of real estate developments and emerge as winners," added Laroche. "Now is as good a time as any for deal making."

But for the deal seekers, a measure of caution would be good to have. The A.T. Kearney research indicates only 29 per cent of all mergers create value.

To do that companies must first merge for the right reasons. For the region's developers, A.T. Kearney suggests, these reasons should enforce the strategic direction of the company, that is, seek to consolidate the industry and gain market share, acquire trained workforce, new capabilities and know-how, strengthen local competitive advantage, diversify in new lines of business as well as expand geographic reach and coverage to capitalise on an improving economy.

Secondly, it is important for companies to consider the size of the deal to realise the expected value. Across industries, it is becoming increasingly popular to acquire medium or smaller-sized firms, which are more easily integrated into operations and over time support organic growth. Tellingly, the real estate space in the region answers just that description.

Decline in M&A activity

The latest statistics show merger and acquisition activity has declined considerably since the economic crisis struck. The value of deals globally fell from $3.7 trillion (Dh13.5 trillion) in 2007 to $2.3 trillion in 2008, a 38 per cent decline. Statistics for the first half of 2009 show a 35 per cent drop to $1.14 trillion.

Simultaneously however the global value of publicly listed companies has in general been slashed, which leaves ample opportunities for forward looking companies with solid balance-sheets to consider acquiring under-valued assets or corporations. In fact, M&A activity has shown signs of recovery across sectors in the first quarter of the year.