Once a niche investment, real estate investment trusts (REITs) have seen enormous growth in recent years, and the flow of money into the sector may be about to accelerate.

Becoming the 11th GICS sector gives listed real estate additional prestige and prominence. S&P and MSCI, as ‘Financial Times’ columnist John Authers noted recently, “have done the Reits industry a big favour”. Photograph: iStockphoto

Earlier this month, global equity indices were reconfigured. Since it was established by MSCI and Standard & Poors in 1999, the Global Industry Classification Standard (GICS) has consisted of 10 sectors. Now there are 11. Real estate, previously classified as part of the financial sector, has been recognised as a standalone sector for the first time.

As S&P index committee chairman David Blitzer said in a June blog post, this is more than a case of “rearranging the place cards on the table”; it is likely to result in increased interest in REITs, quoted companies that own or manage property.

Institutional investors around the world use the GICS system to gauge their asset allocations. The European Public Real Estate Association (EPRA) has estimated the change could drive up to €75 billion into European listed property companies. Currently, approximately half of European institutional property investors do not invest in listed property firms, it says, while the remainder allocate an average of approximately 2.5 per cent.

This reluctance, it suggests, is best explained by concern among institutional investors regarding the volatility of public markets, a concern that may be ameliorated by splitting REITs from the more volatile financial sector.

Underweight

The association promotes the European listed property industry, and sceptics might note that investors wary about exposure to volatile banking shares already have access to exchange-traded funds that focus solely on REITs. Still, others have also argued that the new sectoral changes will catalyse interest in listed property.

Many active fund managers have chosen to stick to conventional stocks with which they are familiar rather than venturing into the world of REITs, which come with their own valuation metrics and tax considerations. According to Goldman Sachs, almost 40 per cent of US large-cap managed funds do not own any REITs, while those that do tend to hold an underweight position. Last year, JPMorgan estimated this underweight position could result in some $100 billion in inflows.

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