Real estate stocks had a big week. But are they still undervalued?
Share prices hold gains from Monday’s vaccine news
Real estate stocks ended the week on a positive note, with companies sustaining gains made earlier this week after Pfizer announced successful trials for its Covid-19 vaccine.
Some of the country’s largest property owners had their best week of trading since June, with share prices rising more than 20 percent, substantially outperforming major indexes.
The share price of SL Green Realty, New York City’s largest office owner, grew 23 percent. Shares of Hilton Worldwide and Marriott International, two of the country’s largest hotel owners, each rose about 15 percent, while retail giant Simon Property Group gained 20 percent. Offices, hotels and retail are among the sectors hit hardest by the pandemic.
News of the vaccine, while positive, did not ultimately change the market’s expectations, according to John Kim, a REIT analyst at BMO Capital Markets.
“Most investors were expecting widespread distribution of the vaccine in the middle of next year,” Kim said. “It’s going to be a pretty tough next couple quarters, at least.”
Last week, SL Green’s deal to sell its office tower at 410 Tenth Avenue for about $950 million, or roughly $1,550 per square foot, set a new high-water mark for the industry. On a price per square foot basis, real estate shares are trading at about one-third that level, said Kim.
“I think some kind of discount is warranted because we’re going to go through a cycle of declining rents,” Kim said. “But I would argue it’s too steep of a discount right now.”
This week’s increase in real estate share prices reflects an investor rally around value stocks, said Jonathan Miniman of CBRE Clarion, the listed real-assets arm of CBRE Global Investors. Companies whose shares trade at a relatively low price-to-book multiple typically indicate a value stock.
“Sectors like shopping centers … and coastal apartments are trading at discounts that don’t reflect how quickly companies could see fundamentals and cash flows rebound,” said Miniman.
Growth stocks, which have led market gains since the pandemic began, trade at higher price-to-book values and are often associated with tech companies. But those suffered this week: Zillow Group fell more than 10 percent and CoStar Group was down nearly 2 percent.
“We don’t think [growth] will be a straight line higher, and in the near-term, performance could be choppy,” said Miniman.