Effective September 1, 2016, the Global Industry Classification Standard (GICS), the basis for the S&P and MSCI indices, will be updated to include an eleventh sector for real estate. Currently, real estate is classified within the financial sector along with banks, diversified financials, and insurance. The update highlights real estate’s continued emergence as a separate and distinct asset class. The implications for the real estate sector and publicly traded real estate investment trusts (REITs) should be a net long-term positive due to increased investor focus and analysis of underlying sector fundamentals (i.e., yield), resulting in additional longer-term capital investment in the asset class.
This update marks the first update to GICS since its creation in 1999, and is consistent with previous classification updates made by North American Industry Classification System (NAICS) in 2007 and Morningstar in 2010 to separately classify real estate. The new real estate sector will consist of REITs, along with real estate management and development companies with mortgage REITs, involved in real estate financing, remaining within financials (see chart below).
Additionally, the new real estate sector should result in increased investor attention since the classification structure of GICS has typically framed much of the product development, investment research, media coverage, and investment strategies of institutional and individual investors.
The separation of real estate will shed more light on the sector’s underlying fundamentals, particularly its favorable yield relative to traditional financials. This is a particular area of focus for income-oriented investors in today’s low-interest-rate environment. Based on recent analysis by AEW Capital Management, LP in Boston, the average yield on the real estate GICS would be 2.8% vs. 1.9% for financials (excluding real estate). This 2.8% yield would currently be the fourth-highest-yielding GICS sector.
Real estate fund managers have long maintained that generalist equity managers have historically been underweight real estate, opting instead to obtain their financial sector exposure via traditional financials firms and insurance companies. According to Capital Innovations, a real asset manager, as of December 2015, domestic equity funds relative to index weights were under allocated to REITs by roughly $100 billion. Domestic equity managers had been allocating a mere 2.3% to REITs relative to an estimated index weighting based on market capitalization of 4.4%.
Overall, the new real estate GICS classification should have a positive long-term impact on the real estate sector, as additional capital flows into the sector from heightened investor attention on the separate asset class, favorable yield dynamics, and increased manager allocations to real estate.
|Current GICS Sectors||Updated GICS Sectors Effective 9/1/16|
Source: MSCI and Standard & Poor's
Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.