Real estate companies—such as equity REITs and real estate development/management companies— will soon break out into their own sector on the Global Industry Classification Standard (GICS), separating from the financials sector with banks and insurance companies they’ve been coupled with for so long.
We chatted with NAREIT and other experts to get you all you need to know about the new sector and how it will affect the industry as a whole.
A New Headline Sector
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The Real Estate Sector will be the first newly added sector to the GICS since it was introduced to the S&P Dow Jones in 1999.
In September, the real estate companies in the financial sector will be evaluated and reclassified.
NAREIT Research and Investor Outreach EVP Michael Grupe tells Bisnow about 97% of the new sector’s equity market cap will come from equity REITs. He says the sector is likely to be the catalyst for significant, positive developments in the stock exchange-listed REIT market.
What Is The GICS?
Established in 1999, GICS is the standard classification system used throughout the world to categorize listed equities. Everyone from investors, analysts and economists use this system to analyze investment performance and economic activity, according to NAREIT.
In late 2014, the S&P Dow Jones Indices announced plans to break out REITs and related real estate companies into its own category, effective Aug. 31.
“I think the split really comes from the recognition that real estate should be its own asset class and sector split from banks, especially now, because REITs have had a pretty reasonable track record and represent about 3.5% of the market right now,” Morningstar equity analyst Edward Mui tells Bisnow.
Real Estate Sector Reclassification
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Experts say this split recognizes the progressive nature of the GICS structure, and a testament to growing recognition 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 Composite 1500 Index that will move to the new real estate sector in September—97% of which will be REITs.
REITs account for more than $900B in equity market cap, up from $9B in market cap 25 years ago.
Advantages Of The New Real Estate Sector
Experts say the new sector will increase visibility and promote investment for real estate companies that fall within this new sector, enhancing REIT value as a way to diversify one's portfolio.
“With the sector breakout it’s going to get the real estate sector more exposure to the markets, which is probably an overall positive for real estate companies and should allow investors to better allocate their investments between different asset classes,” Morningstar’s Edward tells us.
The new classification will also decrease volatility in the financials sector. “Reclassifying REITs from financials, one of the more volatile GICS sectors and a common benchmark for some leveraged ETFs, may also help reduce the volatility of REIT share price,” NAREIT’s Michael tells us.
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