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GICS Classification of Real Estate: A New Era for Investors

CEO Khai Intela
On Aug. 31, 2016, a groundbreaking shift occurred in the global investment landscape. S&P Dow Jones Indices and MSCI, the industry leaders in stock market indices, reclassified equity Real Estate Investment Trusts (REITs) and other...

On Aug. 31, 2016, a groundbreaking shift occurred in the global investment landscape. S&P Dow Jones Indices and MSCI, the industry leaders in stock market indices, reclassified equity Real Estate Investment Trusts (REITs) and other real estate companies from the Financials Sector to a brand new Real Estate Sector, within their Global Industry Classification Standard (GICS®). This move reflects the immense growth and significance of the real estate industry, particularly equity REITs, in the modern economy.

Real Estate Takes Center Stage

The creation of the Real Estate Sector is a historic milestone. It is the first new headline sector introduced since the inception of GICS® in 1999. The decision was driven by the substantial increase in size and importance of real estate companies, with the total equity market capitalization of listed U.S. equity REITs surpassing $1 trillion over the past 25 years.

A Sector of Its Own

The Real Estate Sector now captures nearly 4.0 percent of the equity market capitalization of the S&P 1500, making it larger than Utilities, Materials, and Telecommunication Services. Within the sector, equity REITs account for about 98 percent of the total equity market capitalization, while real estate management and brokerage companies make up the remainder.

GICS Classification of Real Estate Caption: The GICS® Real Estate Sector brings increased visibility to REITs and real estate investment.

The Impact on Performance

The reclassification of equity REITs from the Financials Sector to its own headline sector significantly influenced the performance of the Financials Sector during challenging times. Over a 10-year period from 2006 to 2016, encompassing the Great Recession, equity REITs delivered an impressive compound average annual total return of 9.01 percent, while the non-REIT constituents of the sector averaged -4.06 percent. Additionally, the volatility of equity REITs was lower than that of the non-REIT securities within the Financials Sector.

Equity REITs have also been consistent dividend generators. As of Aug. 31, 2016, they provided a dividend yield of 3.18 percent, surpassing all other sectors except Utilities and Telecommunication Services. In contrast, the non-REIT constituents of the Financials Sector had a dividend yield of 2.02 percent.

Elevating Real Estate Investment

The creation of the GICS® Real Estate Sector has elevated the visibility of real estate as a distinct asset class. This change has compelled investors, managers, and advisors to give more consideration to real estate, particularly REITs, when developing investment policies and portfolios. Additionally, the sector has paved the way for the introduction of new exchange-traded funds (ETFs) focused on real estate investment.

FTSE Russell Joins the Movement

Recognizing the growing importance of real estate as an asset class, FTSE Russell plans to create a new Real Estate Industry Group within its classification system. This move will add further weight to the significance of real estate in the investment landscape. Real Estate will become the 11th ICB Industry Group, representing approximately 4 percent ($2 trillion) of the equity market capitalization of the FTSE Global All Cap Index.

The reclassification by FTSE Russell will be effective after market close on Dec. 31, 2018.

Embracing a New Era

The GICS® Real Estate Sector has ushered in a new era for investors, highlighting the pivotal role of real estate and REITs in the global economy. With increased visibility and recognition as a distinct asset class, real estate is attracting more attention from investors and gaining greater prominence in investment strategies. This shift will undoubtedly shape the future of real estate investment and provide a solid foundation for diversified portfolios.

Disclaimer: This article is intended for educational purposes only and does not constitute investment advice. The inclusion of specific securities or indices is not a recommendation to buy, sell, or hold any particular investment. Past performance is not indicative of future results. GICS® is a registered trademark of McGraw Hill Financial and MSCI Inc.

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