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Real Estate Development Stocks Outlook: Momentum to Sustain

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Real estate development companies are primarily 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 these properties for conducting operations is also a common practice. These companies generate recurring revenues by operating these properties.

Additionally, 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 they operate. They also provide real estate leasing, stewardship, underwriting, planning and entitlement services.

It is worth noting that real estate development companies are primarily classified as financial companies, not construction companies.

Here are the three major themes in the industry:

  • Rising consumer confidence: A strong U.S. economy, low unemployment levels and improved consumer sentiment are vital growth catalysts for the industry. This is because during periods of economic growth, business expansion spurs demand for office space, retail centers, hotels, residential apartments and other commercial realties. Moreover, the recent rate hikes indicate strengthening of the economy, which is anticipated to have positive ripple effects across the industry. 
  • Opportunity Zones incentives to drive investments: The Opportunity Zone program was created through the passing of the Tax Cuts and Jobs Act, aimed at incentivizing private investment in underserved and low-income areas across the United States in exchange for a hefty tax break. In response to this program, trillions of dollar investments are anticipated to be deployed in these opportunity zones over the upcoming years as developers continue to hunt for assets and investment opportunities with strong upside potential. In fact, given the investor demand for real estate investments under the program, capital invested under this will likely emerge as an attractive financing source available to real estate developers. Further, it may compel developers to shift focus from high-income regions to these otherwise blighted neighborhoods. 
  • Exploring alternative financing options: In the light of constrained mortgage environment, market contraction and increasing regulatory requirements, banks are becoming reluctant to provide construction loans and financing. Alternatively, private lenders and real estate fintech firms are being considered to meet capital needs, especially for riskier projects and lesser-known borrowers. Particularly, real estate fintechs provide platforms for firms to expand and diversify their lender base, thus, enabling financing and investment in development projects. In addition, developers can use these platforms for a variety of services, like leasing, acquisition, disposition decisions, and obtaining detailed financial models for property construction financing.

Zacks Industry Rank Indicates Promising Prospects

The Zacks Real Estate – Development industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #91, which places it at the top 36% 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 bright 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.

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 Lags on Stock Market Performance

The Zacks Real Estate – Development industry has lagged the broader Zacks Finance Sector as well as the Zacks S&P 500 composite over the past year.
The industry has declined 12.6% during this period as against the S&P 500’s rise of 1.7%. During the same time frame, the broader sector has declined 6.6%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for valuing real estate development companies, we see that the industry is currently trading at 21.2X compared to the S&P 500’s 17X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.5X.

Over the last five years, the industry has traded as high as 52.4X, as low as 9.9X, with a median of 21.7X. This is shown in the chart below.

Forward 12 Month Price-to-Earnings (P/E) Ratio

Bottom Line

With modest probability of a recession in 2019, the U.S. real estate cycle is expected to last at least another year, in line with the economic expansion. Although interest rates are on the rise and the treasury yield curve is flattening, real estate prices continue to shoot up, hinting at solid net operating income (NOI) growth. In fact, as companies accelerate development activity and convert commercial lands into vibrant income-producing assets, we expect these stabilized assets to drive NOI over the short run.

In addition, real estate developers can no longer deny the overwhelming impact technology is having on the industry. Real estate technology is well equipped to address a number of concerns ranging from affordable housing challenges, long-term labor shortages, to productivity woes. Hence, adoption of technology is helping companies identify investment opportunities, thereby enhancing risk/return profile.

The Zacks Real Estate – Development space doesn’t currently have stocks that sport a Zacks Rank#1 (Strong Buy). However, we present a stock from the same industry, that has a Zacks Rank #2 (Buy), and two stocks carrying a Zacks Rank #3 (Hold), which are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here

BBX Capital Corporation (BBX - Free Report) : This Florida-based company is involved in the acquisition, ownership and management of joint ventures and investments in real estate and real estate development projects. It carries a Zacks Rank of 2, at present. The 2019 consensus EPS estimate for the company has been marginally revised upward to 36 cents, over the past month. Also, the company is expected to witness 28.6% year-over-year EPS growth in the current year.

Price and Consensus: BBX

Land Securities Group PLC (LSGOF - Free Report) : Based in London, the U.K., this Zacks #3 Ranked company’s portfolio primarily includes office buildings, shopping and leisure destinations. The fiscal 2019 consensus EPS estimate for this company remained unchanged at 74 cents, over the past 30 days. Additionally, its current-fiscal EPS is expected to witness year-over-year growth of 5.71%.

Price and Consensus: LSGOF

Great Portland Estates PLC : This Zacks Rank #3 company provides property investment and development services. Its operating business models include Asset management, Investment management, Development management and Financial management. The company’s Zacks Consensus Estimate for fiscal 2019 EPS remained unchanged at 25 cents, over the past month. Further, its 2020 EPS is expected to be up 12%, year over year.

Price and Consensus: GPEAF

Zacks' Top 10 Stocks for 2019

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Land Securities Group PLC (LSGOF) - free report >>

BBX Capital Corp. (BBX) - free report >>

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