It’s about time that real estate had its own sector within the Global Industry Classification Standard (GICS). The addition of the Real Estate Sector took place on August 31st, when S&P Dow Jones Indices and MSCI moved stock-exchange listed Equity REITs and other listed real estate companies and elevated them from a subsector under the Financials Sector.
The Real Estate Sector is the first new headline sector added since GICS was created in 1999.
Real estate companies – including equity REITs and development and real estate management companies – will finally be in a league of their own and no longer lumped with banks and insurance companies. The change reflected the growth in size and importance of real estate in the economy.
However, instead of mass rejoicing, market participants seem to be viewing the reclassification as a retrospective acknowledgement that real estate maturation in the public markets no longer relegates it to an “alternative” asset class.
What is the GICS?
The GICS was established in 1999 and is the standard classification system used throughout the world to categorize listed equities and to analyze investment performance and economic activity, according to NAREIT.
In late 2014, the S&P Dow Jones Indices announced plans to break out REITs and related real estate companies into its own category. Due, in part, to REITs having a reasonable track record and currently representing about 4% of the S&P 1500.
As of December 2015, there were 95 equity REITs and real estate companies listed on the S&P Composite 1500 Index that moved to the new real estate sector. Over the past 25 years, the total equity market capitalization of listed U.S. Equity REITs accounts for more than $1 trillion, up from $9 billion.
The Real Estate sector is the 8th largest of the 11 headline sectors in the equity market capitalization. Making it larger than Utilities, Materials, and Telecommunication Services.
Effects on CRE Industry
The question is how the new sector will affect the industry as a whole. The immediate impact of the reclassification will likely be modest. However, due to about 98% of the new sector’s equity market cap coming from equity REITs – while continued foreign investment in U.S. real estate supports healthy commercial asset valuation – the sector should be a catalyst for significant, positive developments in the stock exchange-listed REIT market.
The increased visibility will work to promote investment for real estate companies that fall within the new sector, which will enhance REIT value as a way to diversify portfolios. A larger and more diverse investor base may also help moderate the severity of real estate market cycles, benefitting the broader economy.
In addition, the new classification will also decrease volatility in the financials sector – financials being one of the more volatile GICS sectors – which may help reduce volatility of REIT share price.
Real estate becoming its own sector within GICS is the next step in providing comfort to investors that commercial real estate, in general, and REITS, in particular, are mainstream investments.
About Meissner Jacquét
Founded in 1992, Meissner Jacquét Commercial Real Estate Services has mastered the components of asset management that directly affect an asset’s underlying value. Our asset management experience includes a working knowledge of real estate investment objectives and valuation; risk analysis; investment buy-sell decision analysis; financing and refinance decisions; and repositioning and renovation decisions. For more information, please contact Brent Williams at 858-373-1113 or [email protected], or visit mjcres.com.
NAIOP Commercial Real Estate Development, Fall 2016, Real Estate Comes Into Its Own
BISNOW, Everything You Need to Know about the New Real Estate Sector Coming to the Global Market in September
REIT.com, GICS Classification of Real Estate