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Real estate status upgrade heralds new investors

Elevation to stand-alone GICS sector raises asset class profile in equity market
Tuesday, August 30, 2016
By Barbara Carss

Real estate is taking on enhanced status as a stand-alone sector in the Global Industry Classification Standard (GICS) used to enable consistent analysis of performance in the equity market. The reclassification from an industry group within the financials sector formally occurs on September 1, and will also introduce a new term for real estate investment trusts (REITs), which will become known as Equity REITs.

Creation of the new eleventh sector is the first addition to the top tier of the GICS structure since Standard & Poor’s and MSCI jointly launched the standard in 1999. At that time, REITs were considered an alternative investment and were not added to the S&P Dow Jones Indices or eligible for the S&P 500 until 2001.

Today, MSCI reports the equity market capitalization of U.S. listed REITs is nearly USD $900 billion. There are 26 REITs in the S&P 500 and 91 in the S&P Composite 1500 index.

“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,” says Remy Briand, MSCI’s managing director and global head of research.

Real estate is expected to gain visibility as a stand-alone sector — joining energy, materials, industrials, consumer discretionary, consumer staples, health care, financials, information technology, telecom services and utilities — which should also prompt new investment products, and increase and diversify the investor base. Analysts speculate this may also moderate trading volatility and ease the slopes of real estate market cycles.

“The GICS sectors are widely used to gauge how asset allocations align with markets. With real estate added to the top line of sectors, investors will notice where real estate is and whether they are over or underweighted,” David Blitzer, managing director and chair of the index committee at S&P Dow Jones Indices, noted in a blog post earlier this year. “Analyses of market movements and fundamentals will focus on real estate the same way they focus on industrials or technology.”

“It’s possible that a few Canadian REITs will see some uplift from index purchasers, but, to me, it’s more about the legitimacy that the new classification offers our asset class globally and the credibility that comes with that,” reflects Michael Brooks, chief executive officer of REALpac. “It means that it is more important than ever that we professionalize our industry and focus on transparency, integrity and good governance.”

The plan to elevate real estate status was first announced in the fall of 2014, following consultation with investors, analysts and the real estate industry. The change will be implemented in GICS Direct — the industry classification template now used for more than 26,000 companies and 29,000 securities trading in world equity markets — on September 1 and in S&P Dow Jones and MSCI indices as of September 17, 2016.

As a stand-alone sector, real estate will have two industry groups: Equity REITs and real estate management and development companies. For now, Equity REITs represent about 97 per cent of the sector’s equity market capitalization. Meanwhile, the instruments renamed as Mortgage REITs will continue be categorized in the financials sector.

“With real estate removed from the financials, the reported dividend yield for financials will drop a bit as real estate moves to be among the higher yielding sectors in the 11, along with telecommunication services and utilities,” Blitzer advised.

Barbara Carss is editor-in-chief of Canadian Property Management.

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