Twenty years ago, Nareit and FTSE Russel partnered to calculate and distribute the U.S. REIT Index Series that has grown to be the leading industry benchmark and a driving force for growth across the industry.
The FTSE Nareit U.S. REIT Index Series is foundational to how the U.S. REIT universe is defined and understood. The indexes create a consistent, rules-based framework for what is investable real estate, and a common reference point for benchmarking and performance evaluation.
“At a basic level, the indexes define the opportunity set and make it measurable, which makes it far easier for capital to engage,” says Curtis Yee, portfolio manager and senior analyst, global real assets securities at BlackRock. That clarity also broadens the opportunity set for REITs by making them easier to underwrite, compare, and allocate to, he adds.
The fundamental equities team at BlackRock use the indexes as both a benchmark and an analytical lens. They anchor how the team thinks about portfolio construction, particularly around sector and geographic exposures, as well as providing a framework for performance attribution. “Importantly, they help us separate broader market and sector effects from true stock-specific outcomes,” Yee says.
The FTSE Nareit U.S. Real Estate Index Series has grown into a comprehensive family of REIT-focused indexes, led by the flagship FTSE Nareit All Equity REITs Index. “Because so many of our clients benchmark to the FTSE Nareit All Equity REITs, that is a helpful common language for us to discuss over and underweight to certain sectors that we like, and also discuss relative performance,” says Daniel Ismail, co-head of strategic research at Green Street.
For example, when looking at how REITs are doing as a whole compared to other industries or the S&P 500, the FTSE All Equity REIT Index is the most helpful comparison because it is one of the most thorough REIT indexes in the market, Ismail adds.
Avenue for Passive Capital
During the past two decades, the FTSE Nareit U.S. Real Estate Index Series has grown beyond the flagship All Equity REITs Index to include other headline indexes, such as the FTSE Nareit Mortgage REIT Index, and FTSE Nareit Real Estate 50, as well as hundreds of customized indexes.
“What's driving this is the growth of the REIT market in itself. REITs are the most efficient way of investing in commercial real estate for the larger population,” says Ali Zaidi, head of real assets & alternatives at the London Stock Exchange Group, the parent company of the FTSE Russell.
“When the REIT industry is growing, it's only natural that you need a bellwether and benchmark, and that's what the purpose has been for the FTSE Nareit U.S. Index. It’s a bias-free, true representation of the performance of REITs,” he adds.
In addition to benchmarking the performance of an active portfolio, the indexes create an important avenue for passive capital to flow into the sector. A majority of investment is allocated through thematic or index driven strategies, not to individual stocks. Once an index is created, that leads to the creation of ETFs, which have been the fastest-growing investment vehicle in the U.S, Zaidi notes. “So, if I were a REIT, I would be primarily obsessed by getting into as many indexes as I can, because that's what investors use to allocate,” he says.
The FTSE Nareit U.S. REIT Index Series has expanded to include numerous thematic and sector-specific indexes, such as data centers, telecommunications/infrastructure, residential, industrial, and gaming, among others. The indexes create different avenues for capital to flow through to sectors within the REIT industry, especially around sectors that are timely or topical.
Catering to Thematic Investing
One aspect that has been a source of strength for Nareit’s partnership with FTSE Russell is understanding that different clients have different use cases. FTSE and Nareit have worked together to create indexes, which in some cases are responding to changes in the industry and in other cases leading changes in the industry. For example, FTSE Nareit created the first index to include cell phone towers with the launch of the infrastructure (later renamed to telecommunications) sector in 2012.
Two years ago, the partners also launched the first global index to include cell towers with the FTSE EPRA Nareit Global Extended Index Series. “That’s the kind of thought leadership that comes out of the partnership where Nareit is thinking about REITs all day and night, and FTSE is focused on the business of running the indexes,” says John Worth, executive vice president, research and investor outreach at Nareit.
The FTSE Nareit U.S. REIT Index Series has evolved along with the industry, expanding to include very specific and granular indexes, such as residential REITs that fall in a specific range for dividend yield and leverage. “It can go into those fundamental details, but the purpose is the same. The purpose is that you can execute a strategy based on an index,” Zaidi says.
If an investor is convinced that data centers plus logistics properties are going to be the better-performing sectors, instead of trying to hand-pick companies, FTSE can put those companies into an index. “It’s our job to make sure that all eligible companies are automatically in that index, and by following that index investors are systematically allocating to that thematic,” he adds.
Plenty of Pivotal Moves
Market participants agree that the most impactful evolution of the FTSE Nareit indexes has been the shift toward better capturing how value is segmented across real estate.
“As the market has changed, the indexes have expanded beyond traditional property types to reflect areas that now represent a larger share of underlying value. That has made the benchmarks more relevant and more useful for allocating capital in line with where value is actually concentrated,” Yee says.
When FTSE Nareit added cell towers to the FTSE Nareit All Equity Index, initially very few active managers benchmarked against it. Now, however, it has become the benchmark index for the REIT industry with an estimated market cap of roughly $1.5 trillion.
“Over time, people have really embraced this broader index that includes cell phone towers, and I think that's part of this evolutionary cycle,” Worth says. FTSE and Nareit can go in knowing that people may not benchmark meaningful amounts of money against an index today, but it’s setting a standard that people will evolve to, he adds. “We’re not waiting for clients to walk in with ideas, we’re going out to the marketplace with ideas,” he says.
When the FTSE Nareit indexes add new sectors, it helps those sectors gain visibility and new investors. That has certainly been the case with data centers, which now represent roughly 14% of the market cap in the All Equity REITs Index. “By evolving with the rest of the economy in terms of how real estate plays a role in that economy, it signals to the investment world that these are very real sectors with scale and staying power, which then helps attract capital to those REITs,” Ismail points out.
More Evolution Ahead
Nareit has a long history of REIT indexes that goes back to the early 1970s. The association was able to bring that time series to the FTSE partnership, which provides insight into more than 50 years of REIT performance. That long-dated nature allows people to review what has taken place over the scope of the modern era in terms of returns and correlations with broader equities and volatilities.
“All of that is really fundamental to how we make the case to the investment community for why REITs should be in a portfolio playing that critical role of real estate,” Worth stresses.
Looking ahead, continued evolution in the REIT industry will generate more opportunities for the creation of new indexes. “We haven't maxed out on the number of indexes. In fact, I expect them to grow more and more as REITs continue to demonstrate that they add value for investors,” Zaidi says.
REITs have proved that they are well-suited to bringing new alternative sectors into the investment frame, whether it's data centers, cell towers or timberland. There will be new opportunities for carve-outs ahead, especially as digital infrastructure continues to evolve. The REIT label, because of its accessibility, transparency, and tax efficiency is going to be the “go-to” vehicle for a lot of those businesses, he adds.
Additionally, progress is not just about adding new products. FTSE and Nareit are constantly making tweaks and adjustments to refine existing indexes. “The compounding effect of all those rule changes is an index that stays current and is aligned with current practices and the evolution of the industry,” Worth concludes.