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 will likely result in increased interest in REITs, quoted companies that own or manage the property. Institutional investors worldwide 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. Approximately half of European institutional property investors do not invest in listed property firms, it says, while the remainder allocates an average of roughly 2.5 percent.
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This reluctance, it suggests, is best explained by concern among institutional investors regarding the volatility of public markets. This problem may be facilitated by splitting REITs from the more volatile financial sector.
Underweight
The association promotes the European listed property industry, and skeptics 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 catalyze 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 percent of US large-cap managed funds do not own any REITs, and those that do tend to be underweight. Last year, JPMorgan estimated that this underweight position could result in $100 billion in inflows.
Doubtless, some of that money has already made its way into REITs. Changes to the GICS system were announced last year, so active managers have had plenty of time to rotate into the industry. However, a recent analysis from Morningstar suggests managed funds remain more than 50 percent underweight for REITs.
Creating a new real estate sector means many active managers, who tend to be wary about owning portfolios that differ significantly from benchmark indices, will face pressure to justify their lack of exposure. Becoming the 11th GICS sector gives listed real estate additional prestige and prominence. S&P and MSCI, as Financial Times columnist John Authors noted recently, “have done the REITs industry a big favor.”
Growing importance
The move recognizes the growing importance of listed property firms in global markets. Although first established in the 1960s, there were no REITs in the S&P 500 as recently as 2001. Today, the index has 28 REITs and property management and development companies.
Worth more than $600 billion, their total market capitalization accounts for approximately 3 percent of the S&P 500 – more than that of the telecom and materials sectors and comparable to the utility sector. REITs have increasingly gained traction outside of the US, including in Ireland, where three firms – Green Property Reit, Hibernia Reit, and Irish Residential Properties Reit (Ires) – have floated on the stock market since 2013.
