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REITs are shining in the new real estate sector on the S&P 500, and investors have taken note—moving billions into real estate stocks this year alone.
Real estate’s split from the financials sector has shaken up stock portfolios, dividing the financial industry in half by separating banks and brokerages, giving each its own spotlight. The move, which took place Sept. 1, has increased REITs' visibility on the S&P 500, requiring investors aiming for balanced portfolios to readjust their investments to accommodate the new sector.
Ahead of the split, investors had poured $7.6B into real estate stocks so far this year—generating the largest inflow to exchange-traded funds (ETFs) so far this year. In August, $1.08B was moved into REITs, according to data from State Street Global Advisors.
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Jon Southard, chief economist at NORC (the social research arm at the University of Chicago), says the capital injections into real estate are one-time movements being made by mutual funds and ETFs that are benchmarking against the S&P 500 Index.
“This has prompted some funds to buy in order to closer reflect the market weighting of REIT stocks,” Jon tells Bisnow. “However, now that the underweighting within funds has been corrected, REITs will need to live by their own performance versus the market to continue any gains.”
REITs split from financials is a testament to growing recognition within the S&P Dow Indices that real estate is now viewed as its own asset class. As of last December, there were 95 equity REITs and real estate companies listed on the S&P Index that moved to the new real estate sector in September; 97% of the sector will be REITs, according to data from NAREIT. REITs account for more than $900B in equity market cap, up from $9B in market cap 25 years ago.
Still, Harvard lecturer and economist Ray Torto tells Bisnow the inflow of cash into real estate securities and ETFs at present are merely a realignment of funds, and does not necessarily reflect confidence in the commercial real estate asset class.
“Security traders are still very focused on the impact on the Fed interest rate increase on asset values,” Ray tells us. “I do think, however, that private equity investors are still very strong on the CRE asset class, and are buying selectively and for the long run where interest rate movements are less of an issue.”
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