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Nicholas Kitonyi
Nicholas Kitonyi
Articles  | Author's Website |

Is Now the Time to Invest in Real Estate Stocks?

Company performances not reflecting rising property prices

October 13, 2017 | About:

Global property prices have been on the rise with some markets already being viewed as potential property bubbles that are about to burst. London, Vancouver, Sydney and San Francisco are but a few. Yet, when you look at most real estate stocks, their performances have not been as stellar.

Some real estate stocks have experienced declines recently while others have been significantly volatile judging from their stock price fluctuations.

One of the best examples of how real estate stock prices have contradicted the overall performance of the property market is Simon Property Group (NYSE:SPG), whose stock price is down 17% over the past 12 months.

As demonstrated using the chart below, shares of Simon Property Group fell from a price of about $200 to about $165. It is also clear that during that decline, there were sharp fluctuations to signify elevated levels of volatility.

Simon Property Group manages several properties across the world with malls (108 in total) dominating its portfolio. The Indiana-based company has offices in North America, Europe and Asia and reports billions in sales every year. Despite its diverse global footprint, though, the company’s stock price performance failed to match the gains reflected in property prices. In most parts of the world, rental prices are reported to be on the rise. North America and Europe, which represent Simon Property Group’s main income bases, have reported some of the highest increases in property prices.

For instance, according to a U.K.-based commercial property agency platform, Prime Office Space, commercial office space prices have risen by as much as 50% over the last few years with some places in major urban centers now going for twice as much per square foot.

On the other hand, in California, commercial office property prices per square foot range in the hundreds with some places like Los Angeles commanding a price as high as $450 per square foot while in Santa Clara prices range from $250 to $350.

In San Francisco, property prices have doubled over the last five years as demonstrated on the chart below courtesy of Zillow (NASDAQ:ZG). In 2012, the average price of a property (residential) in San Francisco stood at just over $660,000, but by 2017 it had shot up to $1.27 million.

By drawing parallels to commercial property prices, it is correct to say that despite having a huge presence in California, Florida and New York, Simon Property Group’s performances have failed to mirror the increase in property prices in its strongholds.

The company’s TTM revenues increased from about $4.26 billion in 2012 to about $5.49 billion while income increased from $1.43 billion to just $1.76 billion. This implies that the company’s revenues are up nearly 30% since 2012 while net income is up 23%, which is still a decent performance for a property management company.

Why has the company’s stock price nosedived over the last three years? Are investors living in fear of the property bubble bursting soon? If that’s the case, then they have been wrong for the last three years, which would suggest that they could be wrong now.

The general outlook of the property market remains positive with property prices expected to continue rising in the foreseeable future. This could imply that better times await companies like Simon Property Group in the near future, which would suggest a potential recovery from the current stock price decline.

Conclusion

In summary, some real estate stocks have experienced turbulence over the last few quarters, but in most cases, this is due to investor perception rather than what the fundamentals dictate. Investors know that the current rally in property prices could end in a burst, and how soon that could happen has been the most perplexing question.

The talk of a potential property bubble has been around for the last couple of years with some suggesting that the pace of economic recovery in the U.S. and other parts of the world cannot sustain the rise in property prices. But the market has proved us wrong by continuously rallying property prices, and this could continue well into the foreseeable future.

Disclosure: I have no position in any stock mentioned in this article.

About the author:

Nicholas Kitonyi
Nicholas is the founder of CAGR Value. He is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on several research sites.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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