Real Estate Slated for Eleventh Headline Sector in GICS®

Stock exchange-listed equity REITs and other listed real estate companies will be reclassified from the Financials Sector and elevated to an 11th headline Real Estate Sector of the Global Industry Classification Standard (GICS), the leading global listed equity classification system maintained by MSCI Inc. and S&P Dow Jones Indices. Industry observers received the news as a major step in the growth of REIT-based real estate investment.

S&P Dow Jones Indices and MSCI Inc. said Nov. 10 that the creation of an 11th headline Sector of GICS, which is proposed to occur after the market closes on Aug. 31, 2016, resulted from the annual review of the GICS structure.

The two organizations noted in their Nov. 10 press release that “Market feedback concerning the creation of a Real Estate Sector under GICS methodology has been very favorable.” Upon implementation, the current REITs Industry within the Financials Sector will be renamed the Equity REITs Industry within the new Real Estate Sector. Mortgage REITs will remain classified in the Financials Sector under a newly created Mortgage REITs Industry and Sub-Industry.

Michael Grupe, executive vice president for research & investor outreach at NAREIT, described the change as “another important and warranted event in the long-term growth and development of stock exchange-listed REITs and real estate companies.” He noted that the classification structure of GICS frames much of the investment research, product development, media coverage and investment strategies of both institutional and individual investors.

Mike Kirby, chairman and director of research at Green Street Advisors, pointed out that the commercial real estate sector hasn’t had its own Sector classification in the past because it had been difficult for investors to access the sector through listed securities prior to the Modern REIT Era.

“The success and growth of the U.S. REIT market has changed that, and classification of real estate as a Sector in GICS is a welcome validation of the fact that any diversified investment portfolio needs significant exposure to REITs,” he said.

Real Estate to Become More Pronounced Asset Allocation

Michael Bilerman, managing director at Citi Research, noted that by making real estate a standalone sector, it will “take the stage as a more pronounced asset allocation, demanding more attention from institutional investors–particularly managers who want to remain market-neutral.”

Kirby predicted that, while there may be some short-lived market disruption when REITs are removed from financial sector indices, “the dollar amounts involved are not really large enough to cause more than a ripple. Ultimately, we will see more REIT-centric investment vehicles formed to focus on the new sector, and the net result should be positive.”

S&P Dow Jones and MSCI are requesting feedback on the proposed implementation date by Feb. 13, 2015, with a final decision to be announced by Mar. 13, 2015.