Real estate equities are finally getting their own investment classification, but the benefits of their change might not be apparent until years after their reclassification while the impact on financial sector ETFs could be immediate.
At the end of August, S&P Dow Jones and MSCI will give REITs and other real estate companies their own sector under the Global Industry Classification Standard (GICS), which categories equities by economic sector.
“I expect the reclassification will have a major impact, but I don’t expect it to happen overnight,” says Michael Grupe, executive vice president of research and investor outreach for NAREIT. “As people work with their advisors, as they accumulate more savings in investments and start thinking more about how their assets are allocated, it’s going to be a plus.”
Following the transition, publicly listed REITs will enjoy newfound visibility to investors, advisors and asset managers, says Grupe.
Grupe does not expect major inflows into REITs on Sept. 1, when the new classification takes effect.
“There’s a thought that when the S&P and MSCI make real estate it’s own separate sector, then general mutual funds, both indexed and active, will have to re-up on REITs to get to the market weight, but I have a little more of a reserved view,” Grupe says. “The more important thing is that this gives the managers of existing Financial sector funds the opportunity to disentangle real estate from those products.”
When the GICS was first established in 1999, REITs were a small sliver of the financials sector. Since that time, the number of REITs has multiplied, their net asset value has increased and several have been listed on the major market capitalization-oriented indexes such as the S&P 500.
REITs were never a good fit with the rest of the financial universe, says Allan Swaringen, CEO of JLL Income Property Trust, a non-traded REIT based in Chicago.
“Real estate and financial services are relatively strange bedfellows,” Swaringen says. “If you think about the underlying performance drivers of financial companies, whether they’re investment management firms or banks, it’s different from what drives the performance and valuations of real estate companies. This is a movement in a positive direction not only for the analyst community, but for the overall real estate industry.”
Non-traded and private REITs will not be directly affected by the reclassification and reconstitution of the MSCI and S&P Dow Jones indices, Swaringen says.