With resumption of economic activities and a rebound in investor sentiment, demand for real estate is likely to rise, increasing development opportunities for companies in the Zacks
Real Estate – Development industry. Moreover, digital transformational efforts and growth in real estate investment volumes bode well for players like The Howard Hughes Corporation ( HHC Quick Quote HHC - Free Report) , Green Brick Partners, Inc. ( GRBK Quick Quote GRBK - Free Report) and Forestar Group Inc. ( FOR Quick Quote FOR - Free Report) . About the Industry
The Zacks Real Estate – Development industry includes companies that are mainly engaged in owning, developing and managing a variety of real estate properties, including commercial, residential and mixed-use parcels. While some developers undertake construction on their land holdings to eventually sell the properties to homebuilders, retaining the same for conducting operations is also a common practice. Operations of these properties provide recurring revenue sources for companies.
Moreover, some industry participants actively undertake strategic activities such as infrastructure improvement along with land planning and development to promote economic development, attract quality job creators and diversify the regions in which the companies operate. These firms also provide real estate leasing, stewardship, underwriting, planning and entitlement services.
Before we delve into the details of the industry, it is worth noting that real estate development companies are primarily classified as financial ones, not construction firms.
What’s Shaping the Future of Real Estate Development Industry? After the COVID-19 crisis casted a pall on commercial real estate investment activity, developers are now seeing decent growth backed by restart of economic activity and decent demand. In fact, investment volumes increased to $61 billion in third-quarter 2020 from $46 billion in the previous quarter, which marked a 10-year quarterly low, per a Improving Commercial Real Estate Activity: CBRE Group, Inc. ( CBRE Quick Quote CBRE - Free Report) report. Notably, as investor sentiment normalizes with economic recovery, the overall increased demand for real estate will provide more opportunity for real estate development, strong land sales and additional gains from asset value appreciation. Further, in light of remote working, e-commerce boom and de-urbanization, the commercial real estate market is witnessing a short-term preferential shift for capital toward industrial and logistics assets as well as apartment buildings in suburban regions, while office, retail and hotel assets have been under extreme stress due to operating challenges. The Opportunity Zone program was created by passing the Tax Cuts and Jobs Act, aimed at incentivizing private investment in under-served and low-income areas across the United States, in exchange of a hefty tax break. In response to this, significant investments are anticipated to be deployed in these zones over the next several years as developers keep hunting for assets and investment opportunities with solid upside potential. In fact, amid the pandemic, the tax benefit advantage of opportunity zone investments has increased the interest of investors. Given demand for real-estate investments under the program, higher investment scope and acceleration of project advancement will benefit developers. Moreover, it might compel developers to shift their focus from high-income regions to the otherwise-blighted neighborhoods. Opportunity Zone Continues to Pique Interest: The pandemic has accelerated the pace of technological adoption by real estate development firms. Amid social distancing norms, many companies quickly resorted to new model home practices by offering 3D virtual tours and live chat features with sales staff as well as increased photographs on websites. Such digital sales efforts will go a long way in enhancing operational resilience and tenant experience. Digital Transformation Efforts to Improve Operational Resilience: Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Real Estate Development industry is housed within the broader Zacks
Finance sector. It carries a Zacks Industry Rank #57, which places it in the top 22% of more than 250 Zacks industries.
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates impressive 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually becoming more confident in this group’s earnings growth potential. Since December 2019, the industry’s earnings estimates for the current year have been revised 37.8% upward.
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 Outperforms Sector, Lags S&P 500
The Zacks Real Estate – Development industry has lagged the S&P 500 composite over the past year.
The industry has lost 2.8% during this period against the S&P 500 composite’s rally of 14.5%. Nonetheless, its decline is narrower than the broader Finance sector’s decline of 5.5%.
One-Year Price Performance Industry’s Current Valuation
On the basis of the forward 12-month price-to-earnings (P/E), which is a commonly used multiple for valuing real estate development companies, we see that the industry is currently trading at 7.13X compared with the S&P 500’s 22.4X. The industry is trading below the Finance sector’s forward 12-month P/E of 16.76X.
Over the past five years, the industry has traded as high as 34.09X and as low as 6.50X, with a median of 19.42X. This is shown in the chart below.
Forward 12-Month Price-to-Earnings (P/E) Ratio 3 Real Estate Development Stocks Worth a Wager The Howard Hughes Corporation: The company owns, manages and develops commercial, residential and mixed-use properties throughout the United States. Its assets include a pre-eminent portfolio of master planned communities, other operating properties and development opportunities. The company has made significant progress on the implementation of its strategic transformation plan that involves a $45-$50 million reduction in annual overhead expenses, the disposal of approximately $2 billion of non-core assets, and faster growth in its core Master Planned Communities (MPC) assets.
The company carries a Zacks Rank #2 (Buy), at present. The Zacks Consensus Estimate for 2021 EPS stands at $2.51. It indicates year-over-year growth of 252%.
Price and Consensus: HHC Green Brick Partners, Inc.: This publicly-traded company operates as a homebuilding and land-development provider. The company has been benefiting from location of its properties in reasonable price-point neighborhoods in most diversified growth markets across the country. Moreover, successful expansion of the company’s Trophy Signature Homes brand also bodes well.
It currently carries a Zacks Rank of 2. The 2020 consensus estimate for EPS of $2.29 denotes 97.4% year-over-year growth for the ongoing year. Further, it is expected to register earnings growth of 20.3% in 2021.
Price and Consensus: GRBK Forestar Group Inc.: This residential lot development company focuses on investments in land acquisition and development.The major portion of the company’s real estate projects are single-family residential communities. Higher mobility rates among younger generations and demographic shifts (aging of U.S. baby boomers) have resulted in low supply of single-family homes, thereby providing development opportunity to Forestar Group. Further, low mortgage rates have also increased home and residential lot sales for the company.
It sports a Zacks Rank of 1 at present. The Zacks Consensus Estimate for fiscal 2021 EPS suggests a 34.7% year-over-year increase to $1.63. Further, it is expected to register earnings growth of 2.2% in fiscal 2022.
Price and Consensus: FOR