The Global Industry Classification Standard (GICS) framework was launched by MSCI and Standard and Poor’s in 1999 to provide a set of indices to measure stock market performance. For the first time a new GICS sector is about to be introduced – real estate.

Key Points:

• The rationale to add real estate as a sector to the GICS classification is that investors are increasingly viewing real estate as its own distinct asset class, rather than a sub-industry within the broader financial sector (Refer Table 1).
• Changes to the GICS hierarchy may lead to a re-pricing of REITs and an increased focus on the REIT to direct real estate pricing relationship.
• It is likely that portfolio rebalancing will result in additional capital flows into REITs, and may result in REITs seeking to acquire additional assets.
• A shift from unlisted to listed funds may be expected if it becomes easier for listed funds to raise capital.
• The JLL Global Real Estate Transparency Index (2014) indicates that most Asia Pacific markets ranked within the bottom 60 per cent of global markets by composite score. A potential shift to listed REITs will increase the level of publicly available information, a step towards improved transparency in these markets.

Real Estate sector standing tall:  The separation of real estate from the financial sector is expected to see real estate trading on its own fundamentals, not finance sector fundamentals. The new real estate sector is likely to be a low beta, cyclical, high dividend yield category, more closely aligned with direct property markets.

Short-term impact: ‘If you change the way you look at things, the things you look at change’: so said the motivational speaker Wayne Dyer. Changes to the risk and return profile for established portfolios will demand a better understanding of the returns and risks associated with the real estate sector.

A temporary increase in market volatility is expected from rebalancing of portfolios by funds that are compelled to change their weightings because of mandates.

Long-term impact: The increased profile of real estate as a stand-alone asset class is expected to attract interest for new specialised real estate sub-industries. The increased interest may lead to securitisation of the new specialised sub-industries and growth in IPOs for the real estate sector.

An increased focus on standardisation of data will allow more accurate cross border comparisons. These factors may lead to sector consolidation due to a potential increase in M&A activity.

Asia Pacific REITs: Australia has always had a stand-alone listed REIT sector, which allows us to analyse how an Asia Pacific REIT index might perform. Broadly, history suggests that within the Australian market A-REITs:

• are more volatile than direct property,
• are lead indicators for direct property, and
• offer similar returns to direct investment in real estate over the long term (Refer Graph 1).

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