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2 Real Estate Operations Stocks Poised to Defy Industry Woes
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The Zacks Real Estate Operations industry constituents’ performances are likely to continue to be affected by factors such as high interest rates to combat inflation, the banking sector’s stress, macroeconomic challenges and geopolitical issues. Debt markets are imposing stricter lending criteria, resulting in limited availability and higher borrowing costs affecting transaction activities. Elevated interest rates are causing clients to exercise caution, leading to transaction delays as investors seek more comprehensive price discoveries.
However, the rising trend of companies outsourcing their real estate needs and pandemic-accelerated shifts create growth prospects for industry players. Technological investments offer a competitive edge. Firms like KE Holdings (BEKE - Free Report) and RE/MAX Holdings (RMAX - Free Report) 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 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 the leasing lines of businesses.
What's Shaping the Real Estate Operations Industry's Future?
High Interest Rates, Macroeconomic Issues Affecting the Business: The industry is anticipated to face ongoing challenges stemming from various factors, including heightened interest rates aimed at controlling inflation, the strain in the banking sector, economic uncertainty on a global scale and a volatile geopolitical environment. Central banks across the world are raising interest rates to combat inflation, resulting in reduced accessibility to credit. This scenario, where borrowing becomes scarcer and more expensive, is exerting an influence on transaction activities. The debt markets are adopting a cautious stance by implementing stricter lending criteria. High interest rates are prompting clients to proceed with caution. Consequently, investors are now seeking more extensive price discovery, which is leading to longer transaction completion timelines. These elements are contributing significantly to a decline in sales and leasing, ultimately impacting the industry's short-term revenue prospects.
Pandemic-Led Structural Changes Continue: The pandemic has brought about substantial changes in the utilization of different types of commercial real estate. Companies have been gradually implementing their strategies to encourage employees to return to the office, but progress has been sluggish. Consequently, occupiers' confidence in making long-term office leasing commitments has not yet reached the levels seen before the pandemic. Furthermore, the speed of business travel and in-person interactions for business purposes have not fully returned to normal. It is expected that operational challenges will persist in the foreseeable future, with clients continuing to exercise caution and causing potential delays in real estate decisions in the near term.
Outsourcing of Real Estate Needs to Gather Steam: Real estate occupiers, spanning corporations, public sector entities, healthcare providers, as well as those in finance, industrial sectors, life sciences and technology, are increasingly opting to delegate their real estate requirements. They are placing their trust in third-party real estate experts to achieve superior execution and efficiency. This trend is creating opportunities for participants in the real estate operation sector. Major players in the industry are capitalizing on this shift, resulting in the acquisition of new clients and the expansion of existing ones. Within this industry, companies will continue to prioritize investments in technology, as it continues to enhance efficiency, deliver distinctive client services and contribute to the expansion of market share.
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 #207, which places it in the bottom 18% 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 dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 36.4% and 39.8% 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 the Sector & the 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 8.4% during this period against the S&P 500’s growth of 15.1% and the broader Finance sector’s rise of 7.7%.
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 17.54X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.47X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.42X. 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 32.20X and as low as 11.39X, with a median of 16.36X.
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 and residential markets. Effective cost reductions and efforts to raise efficiency levels companywide also boost performance. The expansion of its emerging businesses, an improvement in terms of quality and scale in its home renovation and furnishing services, coupled with strong development and efficiency gains in its rental services, place the company well to ride the growth curve.
KE Holdings carries a Zacks Rank #2 (Buy) at present. The Zacks Consensus Estimate for the company’s current-year earnings per share has moved 3.3% north over the past month to 93 cents. This suggests a significant year-over-year increase from 34 cents and is backed by a 23.6% projected increase in full-year revenues. BEKE shares have rallied 6.8% over the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) 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 choppy industry conditions, RE/MAX is poised to benefit from its strategic growth initiatives. With continued RE/MAX agent count growth in Canada and global regions and strategic growth initiatives and building its related pipelines in U.S. markets, as well as efforts to expand its Motto franchise sales operation, RE/MAX is well-poised to ride the growth curve.
RE/MAX currently has a Zacks Rank #2. The Zacks Consensus Estimate for the company’s 2023 earnings per share currently stands at $1.42. RMAX shares have declined 13.3% over the past six months.
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2 Real Estate Operations Stocks Poised to Defy Industry Woes
The Zacks Real Estate Operations industry constituents’ performances are likely to continue to be affected by factors such as high interest rates to combat inflation, the banking sector’s stress, macroeconomic challenges and geopolitical issues. Debt markets are imposing stricter lending criteria, resulting in limited availability and higher borrowing costs affecting transaction activities. Elevated interest rates are causing clients to exercise caution, leading to transaction delays as investors seek more comprehensive price discoveries.
However, the rising trend of companies outsourcing their real estate needs and pandemic-accelerated shifts create growth prospects for industry players. Technological investments offer a competitive edge. Firms like KE Holdings (BEKE - Free Report) and RE/MAX Holdings (RMAX - Free Report) 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 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 the leasing lines of businesses.
What's Shaping the Real Estate Operations Industry's Future?
High Interest Rates, Macroeconomic Issues Affecting the Business: The industry is anticipated to face ongoing challenges stemming from various factors, including heightened interest rates aimed at controlling inflation, the strain in the banking sector, economic uncertainty on a global scale and a volatile geopolitical environment. Central banks across the world are raising interest rates to combat inflation, resulting in reduced accessibility to credit. This scenario, where borrowing becomes scarcer and more expensive, is exerting an influence on transaction activities. The debt markets are adopting a cautious stance by implementing stricter lending criteria. High interest rates are prompting clients to proceed with caution. Consequently, investors are now seeking more extensive price discovery, which is leading to longer transaction completion timelines. These elements are contributing significantly to a decline in sales and leasing, ultimately impacting the industry's short-term revenue prospects.
Pandemic-Led Structural Changes Continue: The pandemic has brought about substantial changes in the utilization of different types of commercial real estate. Companies have been gradually implementing their strategies to encourage employees to return to the office, but progress has been sluggish. Consequently, occupiers' confidence in making long-term office leasing commitments has not yet reached the levels seen before the pandemic. Furthermore, the speed of business travel and in-person interactions for business purposes have not fully returned to normal. It is expected that operational challenges will persist in the foreseeable future, with clients continuing to exercise caution and causing potential delays in real estate decisions in the near term.
Outsourcing of Real Estate Needs to Gather Steam: Real estate occupiers, spanning corporations, public sector entities, healthcare providers, as well as those in finance, industrial sectors, life sciences and technology, are increasingly opting to delegate their real estate requirements. They are placing their trust in third-party real estate experts to achieve superior execution and efficiency. This trend is creating opportunities for participants in the real estate operation sector. Major players in the industry are capitalizing on this shift, resulting in the acquisition of new clients and the expansion of existing ones. Within this industry, companies will continue to prioritize investments in technology, as it continues to enhance efficiency, deliver distinctive client services and contribute to the expansion of market share.
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 #207, which places it in the bottom 18% 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 dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 36.4% and 39.8% 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 the Sector & the 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 8.4% during this period against the S&P 500’s growth of 15.1% and the broader Finance sector’s rise of 7.7%.
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 17.54X compared with the S&P 500’s forward 12-month price-to-earnings (P/E) of 19.47X. The industry is trading above the Finance sector’s forward 12-month P/E of 13.42X. 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 32.20X and as low as 11.39X, with a median of 16.36X.
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 and residential markets. Effective cost reductions and efforts to raise efficiency levels companywide also boost performance. The expansion of its emerging businesses, an improvement in terms of quality and scale in its home renovation and furnishing services, coupled with strong development and efficiency gains in its rental services, place the company well to ride the growth curve.
KE Holdings carries a Zacks Rank #2 (Buy) at present. The Zacks Consensus Estimate for the company’s current-year earnings per share has moved 3.3% north over the past month to 93 cents. This suggests a significant year-over-year increase from 34 cents and is backed by a 23.6% projected increase in full-year revenues. BEKE shares have rallied 6.8% over the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) 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 choppy industry conditions, RE/MAX is poised to benefit from its strategic growth initiatives. With continued RE/MAX agent count growth in Canada and global regions and strategic growth initiatives and building its related pipelines in U.S. markets, as well as efforts to expand its Motto franchise sales operation, RE/MAX is well-poised to ride the growth curve.
RE/MAX currently has a Zacks Rank #2. The Zacks Consensus Estimate for the company’s 2023 earnings per share currently stands at $1.42. RMAX shares have declined 13.3% over the past six months.