The price-to-earnings (P/E) ratio is a commonly cited valuation metric that can help investors decide what stock price is appropriate given the earnings per share (EPS) generated by a company. P/E is, therefore, an important element of fundamental analysis. P/E levels vary due to several factors including growth rate and macroeconomic conditions, and valuations are different across industries. The earnings part of the P/E ratio can refer to trailing or forward estimated earnings, and forecast earnings are typically more influential for valuation purposes. The real estate sector is not universally defined, but it generally includes real estate income trusts (REITs), property managers and property developers. It is common for established real estate companies to trade at 35-45x forward earnings, due in large part to the fact that REITs are evaluated with different metrics, such as funds from operations, than other types of companies.
NYU’s Stern School publishes P/E data for different industries and breaks real estate into four categories. As of May 2015, the data combines all REITs under one umbrella, with average trailing P/E of 43.45 and forward P/E of 59.97. Real estate developers trade at an average of 36.62x forecast earnings. Firms engaged in real estate services and operations exhibit trailing P/E of 48.96 and forward P/E of 23.45. General and diversified real estate companies trade at 61.96x forward earnings.
The stock screener tool on Finviz.com divides real estate companies into somewhat different industry categories. Median forward P/E among real estate developers is 26.27 as of May 2015. Forward P/E for property managers is 26.02. For REITs as a whole, median P/E is 36.9. Large-cap REITs trade at a median forward P/E of 40.78. Subsets within the REITs category include retail, residential, office, industrial, hotels, health care and diversified. Industry-specific median P/E ratios within the REIT space range from 13.95 to 47.1.