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Quarter-End Insights

Real Estate: 'Safety' Becomes More Expensive

Attractive investment opportunities still exist but are much harder to come by, as wary investors flock to 'safer' REIT names.

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  • Morningstar's real estate coverage is trading at a 3% aggregate discount to our fair value estimates.
  • In the U.S., healthcare remains our preferred property sector, and our favorite firm in the sector is  Welltower (HCN), while real estate service firms  CBRE Group (CBG) and  Jones Lang LaSalle (JLL) represent attractively priced long-term opportunities.
  • We continue to view themes in commercial real estate as generally defensive in nature. REITs have been net sellers of real estate and are focused on repositioning and strengthening their portfolios, deleveraging, and capital recycling, while being opportunistic about capital deployment. Development of new supply continues, however, as firms look for higher returns.
  • After a soft start to the year, property stocks have surged in both Australia and New Zealand, with most stocks now at all-time highs. Corresponding with this, we see little value in the sector, which is trading on a forward P/E (interest-rate normalized) roughly 50% above the long-term average. A lurking headwind is the reduced cost of capital having driven an escalation in developments, which points to lower rent growth in outer years. One firm we see as offering an attractive risk/return dynamic is  Goodman Group (GMG).


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