Real estate to get its own unique class given by S&P Dow Jones Indices and MSCI will give real estate its own unique class. This is done because the real estate sector has outperformed the S&P 500 with S&P's REIT industry index up 24 per cent annually since the bull market began in 2009, versus 18 per cent for the benchmark. The new classification will include all real estate investment trusts (REITs) with the exception of mortgage REITs, which will remain classified under financials.
As reports suggest, Tierra Funds has pointed out to reclassifying REITs and real estate operating companies (REOCs) into a standalone sector, apart from providing a more accurate description of the companies themselves, which will likely raise the overall profile of real estate fundamentals.
Being a standalone category is a double-edged sword. The new classification will attract passive investors looking to track a new major sector of the market and may bring in new money from active investors who may not have been aware of the sector's strong performance. But memories of the real estate crash and the mortgage crisis in 2008 may be enough to deter some investors, rightly or wrongly, who still see real estate as risky.
Real estate will be its own category in something called the Global Industry Classification Standard structure, a guidepost of sorts for the global financial community. This marks the first time a new sector has been created under the GICS structure since it began in 1999.
REITs have outperformed the broader markets because they are a strong dividend play in a low-yield environment. They are required to pay at least 90 per cent taxable income annually in the form of shareholder dividends; real estate stocks today provide 7 per cent earnings growth and three-plus per cent dividend yield. In addition, the fundamentals of the commercial real estate market, especially the industrial, apartment and office sectors, have seen a strong recovery since the recession. Their classification under financials may not have highlighted that strength.