When trade begins on Thursday, real estate will have a new importance on the market.
Real estate will be given its own class in terms of the MSCI and S&P Dow Jones Indices, and it will actually be independent from the rest of the categories within the financial sector. This separation is a result of the fact that real estate as a sector has done so well, better than the S&P 500 in fact. The S&P’s REIT industry index has increased by 24 percent every year since the inception of the current bull market in 2009, as opposed to 18 percent for the rest of the categories.
This new category will encompass all REITs (real estate investment trusts), except for mortgage REITs. This will continue to be in the category of financials.
However, being its own category is not 100% positive. The new classification will indeed bring in active investors who have not yet been apprised of the strong performance of the sector, as well as passive investors who are looking to be a part of a new major sector. However, some investors who still see real estate as a risk because of the mortagage crisis of 2008 and the recent real estate crash may shy away.
REITs have done better than the broader markets because they happen to have strong dividends in an environment with relatively low yields. REITs must pay out a minimum of 90 percent taxable income every year in shareholder dividends. Stocks in real estate offer more than 3 percent dividend yield and 7 percent earnings growth. Additionally, the apartment, office, and industrial sectors, as well as other fundamental sectors of commercial real estate market, have recovered well after the recession, and their categorization as part of the financials may not have done this recovery justice.
Essentially, real estate is about to be its own category in the Global Industry Classification Standard structure, which serves as a kind of guidepost for the global financial community. This independent categorization of real estate is the first time that the GICS has accepted a new sector since its inception in the year 1999.
According to Remy Briand, the global head of research and managing director at MSCI, “This is the first significant structural change to GICS sectors since its inception and reflects the position of real estate as a distinct asset class and a foundational building block of a modern portfolio, rather than an alternative. GICS was developed as a means of standardization that would keep up with the evolving investment landscape.”
The new categorization was initially announced last spring. Naturally, this change is creating some anxiety, as would any change that is this momentous. Alexander Goldfarb, the senior REIT analyst and managing director at Sandler O’Neill, states, “Unanticipated consequences are that people that are looking at the current financial index [are seeing] those returns have been enhanced by real estate. REITs will come out of financials, so the performance of the financial index can lose what had been a strong tailwind.” However, it remains to be seen exactly what the consequences of the change will be. The worries that some people have may turn out to be
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September 22, 2016