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Quarter-End Insights

Real Estate: For the Strong Stomached, Commercial Real Estate Looking More Attractive

After the recent market sell-off, the real estate sector looks more reasonably valued.

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  • Morningstar's real estate sector looked expensive earlier in the year, but following recent market weakness, it now appears to trade at a 10% discount to our estimates of value, roughly in line with the discount on Morningstar's aggregate coverage universe. 
  • In the U.S., our favorite property sector remains health care, with all three stocks under coverage-- HCP (HCP),  Health Care REIT (HCN), and  Ventas (VTR)--trading at material discounts to our estimates of value.
  • Property stocks in Australia and New Zealand have retreated, but not as much as the broader market. Stocks hit hardest are those with exposure to residential development or emerging markets. We think the sell-off has been overplayed, with Goodman Group (GMG) and Stockland (SGP) both attractively priced at current levels. 
  • Recent trends in commercial real estate persist, including investor fears over the potentially negative impact of rising interest rates, REITs' preference for developments over acquisitions, and increased international capital flows for real estate investments. 

Over the course of 2015, Morningstar's real estate sector coverage has moved from one we viewed as largely overvalued to one that looks more reasonably priced. The sector trades at a 10% or so aggregate discount to our estimates of value, roughly in line with the discount associated with our overall coverage universe. Investors should continue to be selective in the space, however, as plenty of real estate firms continue to trade above our estimates of value. 

Todd Lukasik does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.