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On September 1, Real Estate will become a distinct sector in the Global Industry Classification Standard (GICS), elevating it from its former position as part of the Financials sector.
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Real estate investment trusts (REITs) offer a diversified, cost-effective, transparent way for investors to access commercial real estate and are available today in nearly 40 countries around the world.
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REITs can act as a portfolio diversifier and an inflation hedge; research supports the fact that they also hold up well in periods of rising interest rates.
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We believe that holding global vs. US-only REITs can further enhance portfolio risk-adjusted returns and offers exposure to a diversified set of geographic and economic environments.
September 1st will mark an important milestone for the real estate investment trust (aka REIT) industry. Effective that date, real estate will become the 11th sector in the Global Industry Classification Standard—the first new sector since Standard & Poor’s and MSCI formulated GICS in 1999. Here’s how MSCI explains the GICS addition: “With the creation of the new Real Estate Sector, we acknowledge its growing importance in today’s global economy. This change will elevate its position from under the Financial Sector, recognizing Real Estate as a distinct asset class and a foundational building block of a modern portfolio.”
I’m aware of some industry projections that a tsunami of tens of billions of dollars of new capital will pour into real estate once it’s a separate and distinct sector (indeed, the looming change may already have stimulated inflows into REITs this year). I have no idea if those forecasts will be realized, but it is easy to imagine that REITs will attract more money from diversified mutual funds, institutional and other investors simply from its higher profile after it is split off from financials. Additionally, being categorized and traded more distinctly from banks, insurance companies, and other financial companies could also reduce correlations with the broader equity market (which would enhance REITs’ portfolio diversification benefit, a theme I will return to below), improve REIT securities’ liquidity, and lower the sector’s cost of capital.
This stock market development represents an opportunity for investors to review their exposure to diversified real estate and REITs, and I have long believed that many investors are particularly under-allocated to REITs outside the US (nearly 40 countries now have REIT legislation in place). In the balance of this entry, I’ll briefly summarize what I think makes global REITs an attractive asset class for most investment portfolios.
Making Commercial Real Estate More Accessible
The creation of REITs—publicly traded securities that own and operate properties such as office and apartment buildings, shopping centers, hotels, and self-storage facilities—effectively democratized commercial real estate investing. These securities provide investors lacking large pools of capital with exposure (and with excellent liquidity) to commercial projects and professional real estate management. We view REITs as an attractive long-term strategic portfolio holding that generates returns that are highly correlated over market cycles with those of private real estate markets, as measured, for instance, by the National Council of Real Estate Fiduciaries (NCREIF).