When U.S. REITs secured their own investment classification on the Global Industry Classification Standard (GICS) last year, the move was heralded as a potential game changer not only for REITs but also for all U.S.-based real estate. This would broaden their exposure to a larger universe of investors, proponents argued. Even so, analysts noted, the manifestation of any upside will take time.
“The change in GICS classification gives the real estate industry a more prominent place on the investment shelf,” said Cedrik Lachance, director of U.S. REIT research at Green Street Advisors. “It is therefore positive for the long term, as investors will likely spend more time analyzing the merits of the group. But in the near term, the impact has been mitigated, which is not entirely surprising, given that real estate was already on a shelf with other financial stocks, and investors were already making the decision to invest in these stocks or not.”
Last September S&P Dow Jones Indices and MSCI moved equity REITs and other listed real estate companies from the financials sector to a new real estate sector, the latter being the first new GICS sector since the creation of the classification standard in 1999. The last major market change of this sort occurred in 2001, when REITs were included in the S&P indexes for the first time.
Ultimately, the theory is that increased visibility will make REITs more attractive to institutions, investment managers and financial advisers that had not previously paid much attention to REITs or real estate. But tracking the direct impact of the GICS move precisely could prove difficult. “It would be wonderful if we could track and provide a very clear attribution as to which group is buying or selling the REITs, but, unfortunately, it’s not that simple,” said Paul Adornato, a senior REIT analyst with BMO Capital Markets, in Toronto. “The impact will mostly be felt by non-REIT-dedicated investors, so it’s always a difficult task to try to track those fund flows specifically.” Longer term, however, the overall benefits should become clear, Adornato says. In particular, he calls attention to the prominence of retail REITs as a potential draw. “Simon Growth Properties, GGP and Macerich are some of our largest U.S. REITs, and so the GICS classification provides a little bit more focus, because they are now the most visible to outside investors who might not otherwise focus on REITs but may have a chance to now, due to the GICS reclassification.”
In fact, this year could prove to be pivotal for measuring the impact of the GICS reclassification, according to Margaret Caldwell, managing director of retail at JLL Capital Markets. “We anticipate that there will be significant growth in the real estate sector as fund managers begin to diversify and increase allocations into real estate,” Caldwell said. “Most likely, this will occur in 2017 as institutions review their portfolios and realize they are underinvested in real estate.”