Underweight real estate? That’s going to change

June 7, 2016 | Last updated on June 7, 2016
2 min read

Real estate will be established as a separate sector under the Global Industry Classification Standard (GICS), as of August 31, 2016. Right now, real estate stocks and REITs are part of the financial sector.

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“The creation of [this] 11th GICS sector won’t herald an instant change in the pricing, volatility and performance of real estate stocks, but it will expose to all generalist investors their own relative weight to REITs,” says Chip McKinley, senior vice-president and portfolio manager with Cohen & Steers in New York. Among other real estate funds, he manages the Renaissance Global Real Estate Fund.

This is important because most investors are significantly underweight REITs, he adds. “The magnitude of [this] underweight, to put it into context, has been estimated at $100 billion.”

However, “This hasn’t shown up in portfolios because real estate has been [included in] the financial sector. Now, whether clients are overweight or underweight REITs will have to be explained.”


And, as the sector draws more attention, “This will lead to some migration of capital into the sector as [investors] reduce or eliminate underweight positions,” says McKinley. “But this will happen over time.”

One benefit of this shift, he notes, is investors who wish to buy or sell the financial sector and who do so through ETFs, will no longer have to include REITs in that activity. “That may lower the correlation of REITs to financials and, perhaps, may lower volatility. That would be beneficial for REIT risk premiums.”

Read: Don’t fear mortgage-related assets

One thing to keep in mind is, along with real estate stocks, only equity REITs that own physical property will be included in the new GICS sector. Mortgage REITs will still be part of the financial sector.

For more on REITs, read:

Don’t fall into the NAV trap

Why U.S. REITs are attractive

Real estate execs choose U.S. over global investments

Real estate hits and misses in Australia