2 Real Estate Development Stocks to Buy Despite Industry Woes
The performances of the constituents of the Zacks Real Estate – Development industry are likely to be affected by rising interest rates and macroeconomic uncertainty, which have an adverse impact on buying power. Many potential buyers are either pausing or reconsidering their purchase decisions, thereby causing a delay in the closing timeline for transactions. Also, multiple disruptions in the supply chain are resulting in a shortage of construction materials, leading to a rise in material costs. This industry is thus bearing the brunt of higher construction and development costs, and any turnaround is likely to remain elusive in the near term.
Nevertheless, the industry is likely to get some support from rising demand for a number of property types. Moreover, the pandemic-induced behavioral changes of consumers offer scope to reconsider the optimal usage of real estate. Apart from these, real estate developers are striving toward digital transformation at job sites and in back offices, which would go a long way in enhancing operational resilience. Amid this environment, The Berkeley Group Holdings plc BKGFY and Barratt Developments plc BTDPY are expected to benefit from the favorable trends and ride the growth curve despite industry woes.
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. Some industry participants actively undertake strategic activities, such as infrastructure improvement, along with land planning and development to boost economic development, attract quality job creators and diversify the regions in which the firms operate. These firms provide real estate leasing, stewardship, underwriting, planning and entitlement services. Real estate development companies are chiefly classified as financial ones, not construction firms.
What's Shaping the Future of the Real Estate Development Industry?
High Interest Rates and Market Uncertainty to Affect Business: High interest rates to tame inflation and market uncertainty are likely to have an adverse impact on this industry’s performance. This is because such factors weigh on buyer sentiment and impact buying power. Amid these, many potential buyers are either pausing or reconsidering their purchase decisions, thereby causing a delay in the closing timeline for transactions. With central banks around the world opting for interest rate hikes to tame inflation, there is a reduction in credit availability. This combination of less available and more expensive debt is affecting transaction activities. Higher interest rates are making clients adopt a cautious approach too. As a result, investors’ desire for greater price discovery is causing a delay in the closing timeline for transactions.
Supply-Chain Woes and High Material Costs to Impact Business: Multiple disruptions in the supply chain are causing a crunch in construction materials, in turn prompting a rise in material costs. These supply-chain issues and tightness in the labor market are prolonging the development cycles in a number of markets. As a result, this industry is bearing the brunt of higher construction and development costs and any turnaround is likely to remain elusive in the near term.
Improving Real Estate Market Makes Room for Growth: Over the recent quarters, the values of a number of property types, including industrial and apartment, experienced improvement. Also, the pace of deterioration in other asset categories has moderated considerably. Digital transformation efforts to optimize operations will remain a key focus. Moreover, real estate developers are well poised to capitalize on consumers’ behavioral changes triggered by the pandemic. The e-commerce boom and supply-chain strategy transformations are spurring demand for industrial spaces. Demand for retail real estate spaces in high-traffic corridors is also improving as retailers that have been able to beat the pandemic blues are now eyeing expansion. Flight-to-quality is likely to accelerate development activities for offices and other in-demand real estate categories. Also, demand for mixed-use assets is gaining momentum, in turn strengthening the growth scope for the real estate development industry constituents.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Real Estate Development industry is housed within the broader Zacks Finance sector. It carries a Zacks Industry Rank #155, which places it in the bottom 38% 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 outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. For 2023, the industry’s earnings estimates have moved 20.9% south over the past year.
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 and S&P 500
The Zacks Real Estate – Development industry has underperformed the S&P 500 composite and the broader Finance sector over the past year.
The industry has declined 38.3% during this period compared with the S&P 500 composite’s fall of 12.5% and the broader Finance sector’s decline of 16.9%.
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 6.44X compared with the S&P 500’s 17.74X. The industry is trading below the Finance sector’s forward 12-month P/E of 12.62X. This is shown in the chart below.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Over the past five years, the industry has traded as high as 44.40X and as low as 3.10X, with a median of 15.89X.
2 Real Estate Development Stocks to Buy Despite Industry Challenges
The Berkeley Group Holdings plc: The Berkeley Group Holdings plc engages in residential-led property development focusing on urban regeneration and mixed-use developments in the United Kingdom. The Berkeley Group Holdings plc is headquartered in Cobham, the United Kingdom.
Despite the uncertainty in the market, Berkeley, with unrivaled land holdings in the United Kingdom, is poised to benefit from the under-supply of new homes.
BKGFY carries a Zacks Rank #2 (Buy) at present. The Zacks Consensus Estimate for fiscal 2023 EPS has been revised 5.3% upward to 99 cents over the past two months. The company’s shares have rallied 6.0% in the past three months.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Barratt Developments plc: The company engages in the business of developing residential and non-residential properties primarily in the United Kingdom. Barratt Developments develops houses in towns, cities and rural areas. It operates under brands for house building- Barratt Homes and David Wilson Homes. The company's commercial property development business, Wilson Bowden Developments is focused on retail, leisure, office, industrial and mixed-use schemes. Barratt Developments plc is headquartered in London, the United Kingdom.
With its expertise in the real estate sector, the company is well poised to bank on the post-pandemic shifts in the residential and commercial real estate trends.
Analysts seem bullish on this Zacks Rank #2 stock. The Zacks Consensus Estimate for fiscal 2023 EPS has been revised marginally upward over the past month. Moreover, the Zacks Consensus Estimate for fiscal 2024 EPS has been revised upward by 9.2% over the past two months. The stock has appreciated 12.0% over the past three months.
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