At the close of the stock market on August 31, 2016, a monumental change is set to occur. At that time, commercial real estate is slated to be moved from its current place within the Financials sector of the Global Industry Classification Standard (GICS) into a brand-new, eleventh sector that will be known as the Real Estate sector. This change signals the arrival of commercial real estate in the big leagues within the S&P Dow Jones indices and recognizes its importance, growth and contributions within the realm of investments.
According to MSCI’s equity research head and managing director, Remy Brand, the annual review undertaken by GICS established what has long been suspected within investment circles: “…real estate is now viewed as a distinct asset class and is increasingly being incorporated separately into the strategic asset allocation of asset owners.” The differences between financial corporations and the public real estate industry are vast, with real estate best being served with its own sector. Separating it also ensures that the GICS accurately reflects the industry while providing a viable framework in which it can develop and grow.
Investors need to take note now — before the big change occurs. Soon, there should be some disruption within the industry as index funds begin positioning themselves so they can fulfill the requirement to have stocks in each of the 11 sectors as of the end of August. The result: their price is likely to jump in response to the increase in demand. As Mike Kirby, Green Street Advisors’ chairman as well as its director of research, noted in the REIT article mentioned previously, this move ensures that REITs will now need to be included in a portfolio in order to be considered sufficiently diversified. Indeed, according to Kirby, “Ultimately, we will see more REIT-centric investment vehicles formed to focus on the new sector, and the net result should be positive.”