After years of being classified with banks and money managers, mall-owners, office landlords and other property companies are getting their own sector in one of the most closely followed stock market indices in the world.
S&P Dow Jones Indices, the publisher responsible for the well-known S&P 500 index is elevating real estate companies to a new level of distinction in the investment world.
Currently all the companies in the S&P 500 are classified in one of ten categories such as industrials, healthcare and information technology. Up until now, real estate investment trusts–like Simon Property Group Inc., Health Care REIT Inc. and Equity Residential– have been lumped together with banks in the “financials” subsector.
But that’s going to change. S&P Dow Jones Indices is creating a new real estate category that will include 22 real estate companies. The same classification system is used by S&P’s partner company, MSCI Inc., which publishes indexes of global stocks.
“This is a very important development that recognizes that REITs are a unique real asset class whose fundamentals are driven by the commercial real estate markets rather than the financials sector,” said Joseph Harvey, chief investment officer of Cohen & Steers, one of the largest REIT investors in the U.S. “It is consistent with the superb growth, performance, size and quality of the listed real estate market.”
The creation of these new categories is significant because fund managers often design financial products like index funds or exchange-traded funds composed of investments solely in companies listed in classifications used by these firms. The changes are scheduled to go into effect in 2016 to give market participants time to comment.
“I think it’s a positive move for our little sector,” said David Auerbach, a trader with Esposito Securities, a brokerage in Dallas. “With increasing investor demand, it was only a matter of time until the sector was going to be recognized by Dow Jones and MSCI.”
David Blitzer, chairman of the S&P Dow Jones’ index committee said the new categories are being created by popular demand. S&P Dow Jones regularly surveys institutional investors to see if they’d like changes in the classification system and this is one of the changes that have been requested.
Why? Investors have flooded the REIT sector in recent years as an alternative to fixed-income investments, which pay lower returns in a low-interest rate environment. Because of their tax status, REITs pay high dividends.
“When we first put (the categories) together, and talked to various institutional investors, hardly anybody raised real estate as being the equivalent of the other 10 sectors,” Mr. Blitzer said. “In the last few years, everyone is searching for income. That makes REITs very interesting.”
Mortgage REITs, which buy and sell portfolios of real estate debt securities and make loans, will not be included in the new category, and instead remain under “financials.”
