Equity Commonwealth (NYSE:EQC) is a US$3.72B real estate investment trust (REIT), which is a collective vehicle for investing in real estate that began in the US and has since been adopted worldwide as an investment asset. Real estate analysts are forecasting for the entire industry, negative growth in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the US stock market as a whole. Today, I will analyse the industry outlook, as well as evaluate whether Equity Commonwealth is lagging or leading in the industry. View our latest analysis for Equity Commonwealth

What’s the catalyst for Equity Commonwealth’s sector growth?

Issues around rate hikes and yield changes have made investors sceptical of REITs. The capacity for these investment vehicles to absorb a rate hike should be considered, hence, factors such as lease durations and pricing power in the market would require a deeper dive. In the past year, the industry delivered growth of 4.75%, though still underperforming the wider US stock market. Equity Commonwealth lags the pack with its negative growth rate of -89.33% over the past year, which indicates the company will be growing at a slower pace than its REIT peers. However, the future seems brighter, as analysts expect an industry-beating , albeit negative, growth rate of -9.45% in the upcoming year.

Is Equity Commonwealth and the sector relatively cheap?

REIT companies are typically trading at a PE of 19.87x, relatively similar to the rest of the US stock market PE of 18.48x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 7.28% compared to the market’s 10.45%, potentially indicative of past headwinds. On the stock-level, Equity Commonwealth is trading at a higher PE ratio of 171x, making it more expensive than the average REIT stock. In terms of returns, Equity Commonwealth generated 0.90% in the past year, which is 6.38% below the REIT sector.

Next Steps:

Equity Commonwealth’s industry-beating future is a positive for shareholders, indicating they’ve backed a fast-growing horse. However, this higher growth prospect is also reflected in the company’s price, suggested by its higher PE ratio relative to its peers. If Equity Commonwealth has been on your watchlist for a while, now may not be the best time to enter into the stock since it is trading at a higher valuation compared to other REIT companies. However, before you make a decision on the stock, I suggest you look at Equity Commonwealth’s fundamentals in order to build a holistic investment thesis.