2 Real Estate Operations Stocks Poised to Escape Industry Woes
Performances of the constituents in the Zacks Real Estate Operations industry are expected to be impacted by high interest rates aimed at controlling inflation, banking sector stress, macroeconomic challenges and geopolitical problems. The debt markets are witnessing a rise in lending requirements. The dual challenges of limited availability and higher cost of debt are impacting transaction activities. Elevated interest rates are leading clients to take more cautious stances. Consequently, investors seeking more comprehensive price discoveries are causing delays in transaction completion timelines.
However, the increasing trend of companies outsourcing their real estate needs and the acceleration of certain trends due to the pandemic are creating growth opportunities for industry participants. Additionally, investments in technology are providing a competitive advantage. Firms like KE Holdings BEKE and RE/MAX Holdings RMAX are likely to benefit from these trends.
About the Industry
The Zacks Real Estate Operations industry comprises companies that provide leasing, property management, investment management, valuation, development services, facility management, project management, transaction and consulting services, among others. However, real estate investment trusts or REITs are excluded from this group. Economic trends and government policies impact the real estate market (global and regional), which, in turn, determines the industry’s performance. Economic activity, employment growth, office-based employment, interest-rate levels, costs and availability of credit, tax and regulatory policies, as well as the geopolitical environment, are the major factors shaping the real estate market’s fate. Also, the pandemic-induced public health challenges and geopolitical issues have impacted property sales and leasing lines of business.
What's Shaping the Real Estate - Operations Industry's Future?
High Interest Rates, Macroeconomic Issues Affecting Business: The industry's performance is expected to endure the impacts of various challenges, such as elevated interest rates implemented to control inflation, the stress in the banking sector, macroeconomic uncertainty and a volatile geopolitical landscape. Central banks worldwide are increasing interest rates to curb inflation, resulting in decreased credit accessibility. The situation, wherein debt is less available and more costly, is influencing transaction activities. The debt markets are adopting a cautious attitude with stricter lending criteria. High interest rates are prompting clients to proceed with caution. Consequently, investors are seeking more extensive price discovery, leading to transaction completion timelines being extended. These factors are causing considerable weakness in sales and leasing, affecting the industry's revenues in the short-term.
Pandemic-Led Structural Changes Continue: The pandemic has resulted in significant alterations to the use of various forms of commercial real estate. Companies' strategies to bring employees back to the office have been slow to take hold. In this context, occupiers' confidence in making long-term office leasing decisions has not yet rebounded to the pre-pandemic levels. Additionally, the pace of business travel and in-person business interactions have not fully recovered. Operational difficulties are anticipated to persist in the foreseeable future. In particular, the careful approach of clients is expected to continue causing delays in real estate decisions in the near future.
Outsourcing of Real Estate Needs to Gather Steam: Real estate occupiers, including corporations, public sector organizations, healthcare providers and those in industries such as finance, industrial sectors, life sciences and technology, are increasingly choosing to outsource their real estate needs. They are relying on the expertise of third-party real estate professionals for better execution and efficiency. The trend is offering opportunities for participants in the real estate operations industry. The industry giants are taking advantage of this shift, resulting in client acquisitions and expansions of existing ones. For the companies in this industry, the emphasis on technological investments will persist, as the same aids in enhancing efficiency, providing unique client services and contributing to market share increases.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Real Estate Operations industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #187, which places it at the bottom 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the downward earnings per share outlook for the constituent companies in aggregate. Looking at the aggregate earnings per share estimate revisions, it appears that analysts are losing the confidence of late in this group’s growth potential. Over the past year, the industry’s earnings per share estimates for 2023 and 2024 have moved 52.2% and 41% south, respectively.
However, before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms Sector & S&P 500
The Zacks Real Estate Operations industry has underperformed the broader Zacks Finance sector and the S&P 500 composite over the past year.
The industry has declined 13.7% during this period against the S&P 500’s growth of 14.9% and the broader Finance sector’s rally of 6.1%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price-to-EPS, which is a commonly-used multiple for valuing Real Estate Operations stocks, we see that the industry is currently trading at 19.02X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.03X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.38X. This is shown in the chart below.
Forward 12-Month Price-To-Earnings Ratio
Over the last five years, the industry has traded as high as 33.42X and as low as 11.67X, with a median of 16.13X.
2 Real Estate - Operation Stocks Trying to Survive the Industry Challenges
KE Holdings: Based in China, it is a real estate company that provides online and offline platforms for housing transactions and services, ranging from existing and new home sales, and home rentals to home renovation and furnishing, and other services. BEKE owns and operates Lianjia, which is China’s leading real estate brokerage brand and an integral part of its Beike platform.
KE Holdings is poised to benefit from the recovery in the China real estate market and the improving macroeconomic conditions. Favorable government policies and the release of pent-up housing demand from the pandemic augur well for the company.
KE Holdings sports a Zacks Rank #1 (Strong Buy) at present. The Zacks Consensus Estimate for the company’s current-year earnings per share has moved 14.1% north over the past month to 89 cents. This suggests a significant year-over-year increase from 34 cents and is backed by a nearly 24% projected increase in full-year revenues. The company’s shares have rallied 11.7% over the past six months.
You can see the complete list of today’s Zacks #1 Rank stocks here.
RE/MAX Holdings: Based in Denver, CO, it is a franchisor in the real estate industry. The company franchises real estate brokerages globally under the RE/MAX brand and mortgage brokerages within the United States under the Motto Mortgage brand.
Despite the choppy industry conditions, RE/MAX is poised to benefit from its strategic growth initiatives. It has been investing in critical growth-related endeavors like annual RE/MAX and Motto conventions. With solid international agent growth and strategic efforts to improve agent growth in its core U.S. markets, as well as the regained momentum in Motto franchise sales, RE/MAX is well-poised to ride the growth curve.
RE/MAX currently has a Zacks Rank #2 (Buy). While the Zacks Consensus Estimate for the company’s 2023 earnings per share has been unrevised at $1.44, the same for 2024 has moved marginally north over the past month. The company’s shares have gained 7.3% over the past three months.
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RE/MAX Holdings, Inc. (RMAX) : Free Stock Analysis Report
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