When you think store front, when you think home valuations, when you think Real Estate, what is the cliché tagline that comes to your mind first?… I’ll give you a hint, it rhymes with vocation, vocation, vocation. You guessed it! Location, location, location.
Something unusual is happening after August 31st, and it has nothing to do with the rapper Drake! For the first time since a long time, the Dow Jones indexes are opening up a new sector, Real Estate. Previously, there was 10 sectors: Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services, and Utilities. Come September 1st, nothing will be the same as Real Estate will be its own standalone sector with two industries represented within the category; REITs (Equity Real Estate Investment Trusts) and Real Estate Management & Development.
So who decides this stuff anyways? Well, that would be the GICS of course! Otherwise known as the leading classification system for stock exchange-listed equities worldwide, GICS job is to essentially make sure equities are labeled in the right category to ensure “good financial analysis.” GICS is owned by Dow Jones and was assembled in a dark lab somewhere in the desert during 1999. Humor aside, this is the first new headline sector since GICS was created.
What does this mean for Real Estate? For us, the GICS change reaffirms our belief (as we have written about here and here) that Real Estate deserves its own distinction for a well-diversified portfolio. Another blaring positive is that Real Estate will gain more visibility as a mainstream investment vehicle, resulting in a greater understanding from investors across the globe. Just in 2015, domestic investors witnessed some great macro numbers for their timber/steel frame investments. Check out these bullets via thanmerrill.com
A 10.4% increase in total existing-home sales.
A 5.7% increase in the median price.
A reduction in distressed sales, with foreclosures and short sales dropping from 14% of all home sales to just 10%.
40% of all homes are sold within 30 days.
The average price is up 28.2% in the past 3 years.
For me, the most exciting part of this change is how the market will react, specifically Financials. As stated by Barrons, REITs makeup about 20% of the current Financials sector and represent about 15.7% of the total market. Once that 20% leaves Financials and carves out its own space, large institutional investors might feel the need to rebalance some Real Estate into their portfolios. Certain funds will go from 100 million dollar funds to BILLION dollar funds almost overnight, such as XLRE. ETF.com did a great job outlining this change:
“When the index rebalancing is completed and the transition is over in mid-September, SSgA will make the distribution of XLRE shares to XLF investors. When it’s all said and done, based on current price levels, the $114 million XLRE will become a $3 billion fund almost overnight.
XLF, in turn, will go from a $16 billion ETF to a $13 billion one. The influx into XLRE should also help with the fund’s liquidity, which today is small at about 40,000 shares traded a day with a wide spread of 0.29%.
Investors do have other choices. If you no longer wants to own financials as currently defined, you can sell XLF. Or you will now be able to express different views by underweighting or overweighting your allocation to REITs versus financials after the transition is over. The two ETFs represent different sectors of the economy—one driven by the business of land development, the other driven by the business of money.”
In short, benchmarks are changing, institutional managers are rebalancing, and if you haven’t looked at Real Estate as a viable asset for diversification then you should really take a peek before the hot meal turns cold.
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