Market participants do not project any market-moving reaction when listed property today officially becomes a separate industry sector in the Global Industry Classification System (GICS).
Analysts, consultants and portfolio managers use GICS for research, asset allocation, and portfolio construction and performance evaluation.
“Our sense is that there will not be a ’big bang’,” says Steven Marks, managing director at Fitch Ratings and head of the agency’s US REITs group.
“The changes were well communicated, far in advance, so portfolio managers have had time determine what adjustments they will need to make, or have already done so.”
The Real Estate Investment Trusts Industry is being renamed as Equity Real Estate Investment Trusts. Equity REITs and real estate management and development companies will shift into the newly formed sector, while Mortgage REITs will remain in the Financials sector under a newly created Industry and Sub-Industry, called Mortgage REITs.
Pulling property out of the financial sector means generalist portfolio managers will need to increase their holdings in listed property to reflect the sector’s weight in indexes, or take the risk that performance might vary from the benchmark.
In total, according to Lazard Asset Management, over $7.8tn in assets is benchmarked to the S&P 500 Index, with more than $2.2tn directly indexed via exchange-traded funds, mutual funds, and other investment products.
“The reclassification will impact the financial ETFs first, and the underlying real estate securities next,” says Jeroen Vreeker, an analyst at Global Property Research. “While the short term market impact will be minimal, the expectation is that this will be mostly felt in the US, as ETFs are overwhelmingly focused on that country.”
Market participants said there is no reliable indication whether there have been any flows into REITs as yet, and that portfolio changes will likely be reported in listed vehicles’ regulatory filings in coming quarters.
Marks expects a “phase-in period”.
The first step in the phase-in will come when index components are changed on 16 September.
The September/October issue of IPE Real Estate contains an in-depth analysis on the impact of making listed property a separate industry sector.