Downgrading Real Estate Services Moats
We still think JLL is undervalued, however.
After taking a fresh look at the real estate services industry, we have downgraded our economic moat ratings for CBRE Group (CBRE) and Jones Lang LaSalle (JLL) to narrow from wide. We still believe these companies have robust competitive advantages because of their reputation-based intangible assets and switching costs, but we are no longer confident that excess returns will persist for 20 years. Both companies operate in a cyclical industry that is rapidly consolidating, raising the prospect that they will compete more directly once consolidation eventually stabilizes. We are also cautious about the potential effect that technology might ultimately have on the broker/client relationship.
Nevertheless, we remain confident that CBRE and JLL can maintain their competitive edge for the next 10 years. Both companies boast strong reputations, which is incredibly important in real estate services, where relationships are paramount to the dealmaking process. These reputations also help CBRE and JLL attract large multinational clients in the corporate outsourcing business. We think both companies also benefit from switching costs because of the difficulty involved in switching outsourcing providers. Both are increasingly bundling various services as larger companies seek out a one-stop shop for all their real-estate-related solutions. We think these forces should endure, allowing both companies to deliver excess returns in the foreseeable future.
Yousuf Hafuda does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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