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Real Estate Gets Own S&P Sector, But Could It Lead to Froth?

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Real Estate Gets Own S&P Sector, But Could It Lead to Froth?

S&P Dow Jones' announcement yesterday that real estate would get its own classification on the S&P 500 index—it currently mingles with banks in the "financials" sector—was hailed by many observers as a new sign of respect for the industry. But other commentators are arguing that while the new classification is probably a wise idea, it could compound the risk of a real estate bubble.

In the Financial Times John Authers writes that the move "will mean more interest, more buying and hence at first improved performance for real estate." But he cautions that the frantic growth in the value of real estate listings, which has quadrupled since bottoming out during the recession, is likely "overdone" and that increased investor interest will only exacerbate the problem.

On the other hand, REITs, which in large part propelled the RE comeback, stand to make huge gains in the new index, which goes into effect in 2016. “This is a very important development that recognizes that REITs are a unique real asset class whose fundamentals are driven by the commercial real estate markets rather than the financials sector,” Cohen & Steers CIO Joseph Harvey told the Wall Street Journal. “It is consistent with the superb growth, performance, size and quality of the listed real estate market.”