HOUSTON—Real estate's debut as a standalone sector within the Global Industry Classification Standard is good news for the industry, both as a recognition of growth during the past quarter century and as a harbinger of investment dollars. The new category is expected to funnel $100 billion into the sector as investors diversify portfolios by adding or increasing real estate exposure, according to Transwestern.

A new designation within the GICS treats public real estate companies and REITs as distinct from the financials sector, which also includes banks, diversified financials and insurance. The new 11th sector encompasses equity REITs along with real estate management and development companies, under the code 60, allowing for more seamless global comparisons for this type of investment. Sector 11 is the ninth largest out of the GICS categories and similar in size to the utilities sector.

The standard also has renamed the Real Estate Investment Trusts Industry as Equity Real Estate Investment Trusts, which excludes mortgage REITs. The latter remains in the financials sector under a newly created sub-industry.

“There is another very important distinction between REITS and former financial sector peers, such as banks and insurance companies,” Tom McNearney, chief investment officer of Transwestern tells GlobeSt.com. “REITs report on all of their underlying property assets, while banks and insurance companies are more opaque and provide only limited information on the quality of their loans. Therefore, it is far easier to ascertain the quality of the underlying REIT assets. Further, since property leases often have built-in rent escalations, REITs have some protection against rising rates and inflation.”

The total capitalization of REITs has grown tremendously, from about $5 billion at the beginning of the 21st century to almost $900 billion today. It is estimated that sector 11 will encompass approximately 2,600 companies, including more than 700 equity REITs and almost 1,900 real estate management or development companies, says Transwestern.

Commercial real estate returns, based on property fundamentals and performance rather than on the fundamentals driving banks and insurance companies, bear a low correlation to stocks and bonds. Real estate, therefore, merits inclusion in a portfolio, not as an alternative investment, but as a core asset to diversify the portfolio, mitigate risk and enhance overall returns.

Since the Great Recession, REIT values have increased by double the performance of the S&P 500. REITs are also a good source of current income, providing a dividend yield of 4%, approximately double that of the S&P 500.

REIT volatility was in part due to the inclusion with financial companies, so removal into a new investment class should reduce price volatility and expand portfolio-enhancing powers. Under the new classification, REITs will have a 3% weighting of the S&P 500 and financials will drop to 12.5% of the index.

The change is not likely to affect commercial property values or share prices appreciably. What will change is the way investment managers view the sector and weight it in portfolios. Fund managers will have to adjust portfolio weightings to better reflect market capitalization, says Transwestern.

More than 300 of the industry's leading national investors, REITs, banks, private equity firms, asset management firms and other institutions will join us as we explore the market conditions behind the trends at this year's RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City. Learn more.

Instant Insights /

Real Estate's Debut as Standalone Sector Has Positive Impacts

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