In the the latest episode of The REIT Report: NAREIT's Weekly Podcast, Mike Grupe, NAREIT executive vice president for research and investor outreach, offered his perspective on the implications of real estate being elevated to a new headline sector under the Global Industry Classification Standard (GICS).
Equity REITs were moved from the financial sector to the new real estate sector at the close of trading on Aug. 31. They were joined by a number of real estate management and development companies. Overall, Equity REITs account for more than 95 percent of the equity market capitalization of the new real estate sector.
Grupe speculated that the greatest effect of the move on REIT investment would be to provide a greater level of visibility for real estate's role in the economy and for publicly traded real estate companies.
"That visibility is important," he said. "Up until now, REITs were embedded in the financial sector, but the financial sector also includes commercial banks, insurance companies, finance companies and other types of diversified financial companies. This change brings [REITs] to the forefront and establishes them among one of the highest 11 headline sectors of GICS."
As a result, Grupe said, real estate will become "a much more prominent part of the conversation" for investment decision makers as they design portfolio strategies and set asset allocations. Grupe also noted that separating real estate away from the financial sector should mean that REIT stocks are more likely to trade based on underlying real estate fundamentals, as opposed to the economic factors that tend to drive financial stocks.
"I think that will create a situation in which real estate companies will be free of those other factors," he said. "We'll see that the valuations of the stocks and the trading activity will reflect more directly the actual developments in the real estate sector."