Real estate equities are to be reclassified next week in changes to global standards that are expected to attract billions in new investment to the sector.
Under the Global Industry Classification Standard (GICS), real estate equities are currently subsumed under financials, but will be separated out from 1 September.
Developed by MSCI and Standard & Poor’s for use by global equity investors, the GICS consists of 10 sectors that will become 11 with the inclusion of real estate.
The change is most directly relevant to investors who use indices run by MSCI and S&P, but the impact is expected to be far-reaching.
Philip Charls, chief executive of the European Public Real Estate Association (EPRA) told Property Week the reclassification would have two key benefits - lower trading volatility and increased visibility.
Other financial stocks tend to be more volatile than real estate so limiting trading linkages between property stocks and other financial shares would stem a major source of that volatility.
“We have been criticised for being too volatile as a sector and that is strongly linked to being classified as part of the financial sector,” said Charls. “One of the consequences is there will be less volatility and that will attract investors.”
EPRA, which is publishing research into the impact of the GICS change on capital flows at its annual conference in Paris next month, said €75bn (£64bn) of investment into European listed property companies could be unlocked from institutional investors that are active in the real estate market but are currently put off the listed sector by its volatility. However, Charls said attracting this money would be “a gradual process”.
The reclassification will also make real estate stocks more visible to generalist fund managers and retail investors. It will expose how underweight some managers are to real estate, putting pressure on them to increase their allocations.
Earlier this year, Jefferies estimated that fund managers in the US were 3.3% underweight to the country’s REITs and would need to plough $154bn (£117bn) into the sector to make this up.
In a briefing paper this week, Grosvenor said it did not expect “stellar flows overnight” but that the decoupling of real estate would shine a light on its special characteristics and strong historical performance, leading to increased investment by generalists over time.
Ivailo Petkov, a director of Grosvenor’s Global Real Estate Absolute Return Fund, said higher capital flows into the listed property sector would have positive knock-on effects, such as encouraging more real estate companies to raise money on the public markets.