- The change will allow real estate to stand alone, without the impact of banks, brokerages and other financial industries.
- This will mean a significant change to the benchmark indexes for the financials and real estate sectors.
- Real estate will become the ninth-largest sector in the S&P 500 Index.
Something new in real estate often means a move and now that’s happening to the sector itself.
New GICS Sector
After the stock market closes on Aug. 31, 2016, real estate will move to its own sector under the Global Industry Classification Standard (GICS®) structure and move out of the financials sector. The change will allow real estate to stand alone, without the impact of banks, brokerages, insurance companies and other financial industries.
The GICS structure was developed in 1999 as a way to offer “an efficient investment tool to capture the breadth, depth and evolution of industry sectors.”1 The GICS sectors are commonly used as a tool to develop portfolio allocations. In addition to changing the GICS list, the move for real estate will mean a significant change to the benchmark indexes related to the financials and real estate sectors — another element in portfolio allocation and review.
After the new sector is in place, real estate investment trusts (REITs) will be approximately 3% of both the S&P 500 Index and MSCI World Index. Depending on the time period and performance factors, the allocation to real estate in both indices typically is 3-3.5%. Within the S&P 500 Index, the sector includes 27 companies and will become the ninth-largest sector with a market value of about $535 billion.
Opening the Door to New Investors
We think the establishment of a specific GICS sector is validation of our view that a diversified portfolio should have a long-term allocation to real estate securities. We believe the change to a dedicated sector will have other key impacts:
- Likely to draw more attention to the asset class from all types of investors;
- Potential for new inflows to the asset class from this broader investor base;
- Increased allocation to REITs is likely from institutional investors, which typically track sectors.
We expect additional opportunities for the sector going forward as existing publicly traded real estate companies grow, new companies come to market and additional countries develop real estate securities markets. Publicly traded real estate included about 330 companies and totaled $1.35 trillion as of May 31, 2016, up more than 20% from the end of 2013.2
Here’s another way to look at it: Public real estate securities comprise less than 8% of the total value of investable real estate around the globe. We think that translates into opportunities for continued long-term expansion, and the GICS visibility may help draw further investor interest.
In general, we think real estate companies are in strong financial positions now and we think their stock valuations are attractive. The combination of current healthy fundamentals and those stock valuations may provide an opportunity for longer term investors. In addition, there are strong private capital flows now and historically high property value levels, yet real estate stocks in general are cheaper than they were a year ago.
1 Source: MSCI
2 Based on FTSE EPRA/NAREIT Developed Market Index, which tracks the performance of listed real estate companies and REITs worldwide.
Past performance is not a guarantee of future results.Investment return and principal value will fluctuate, and it is possible to lose money by investing.
Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. International investing involves additional risks, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets.
The opinions expressed are those of Ivy Distributors, Inc., and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through June 2016, are subject to change based on market conditions or other factors and no forecasts can be guaranteed.
The MSCI World Index is an unmanaged index considered to represent stocks of developed countries. The S&P 500 Index is an unmanaged index of common stocks considered to represent the U.S. stock market. It is not possible to invest directly in an index.
Diversification does not guarantee a profit or protect against loss in a declining market. It is a method to manage risk