A new Global Industry Classification Standard (GICS) index was announced jointly by the S & P Dow Jones Indices and MSCI Inc. in 2015, both of which provide financial indexes used by portfolio managers to benchmark and track investment portfolio performance. Created in 1999, the GICS is a 4-tiered index system comprised of 10 sectors that the S & P Dow Jones Indices and MSCI Inc. separately publish. Now, an 11th sector is being created due to the growth of real estate as a significant investment group. This additional sector could result in lower costs for raising multifamily capital in the future.
Specifically, the new real estate sector GICS will have two industry groups - Equity REITs and Real Estate Development and Management companies and twelve sub-industry groups. The sector will include 232 publicly traded companies that serve all markets including single family and commercial. This may shift share prices on the related group of multifamily companies higher - producing the decrease in multifamily costs associated with raising capital.
Currently, the GICS is a 4-tiered index system comprised of 10 sectors, 24 industry groups, 67 industries and 156 sub-industries. When it comes to the new 11th sector, the Equity REIT industry group has 8 subindustry groups of which residential is one. This residential subindustry has 20 publicly traded REITs that own both multifamily and single family rental properties. These REITs may see an increase in trading in their stocks as investors and fund managers reallocate their investments to match the new sector.
The change was made in order to recognize that real estate as an asset class has grown in its importance, but, more importantly, that its performance did not track other companies found in the existing financial sector GICS. The financial sector GICS is, and will remain, the largest and with the removal of real estate its composition will now be largely made of banks and insurance companies.
As a result, the financial sector and the real estate sector GICS will each be comprised of asset classes that are more closely correlated in their performance metrics. Fund managers who use the GICS to index their performance may have to reallocate their holdings to match the new real estate GICS and smaller financial GICS. Although real estate focused, Mortgage REITs will remain in the Financial GICS sector, but will be in a new industry group, since their performance is more closely correlated to the existing financial sector stocks.
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