Gerstein Fisher: New REIT Classification Could Make CRE More Accessible

Last week real estate became a distinct investment sector, which could make commercial real estate investment more accessible, reported investment advisory firm Gerstein Fisher, New York.

On Sept. 1, real estate investment trusts earned their own sector in the Global Industry Classification Standard. They had appeared in the “Financials” sector previously. GICS publishers Standard & Poor’s and MSCI said they created the new sector to acknowledge real estate’s growing importance in today’s global economy.

“This change will elevate [real estate’s] position from under the Financial Sector, recognizing real estate as a distinct asset class and a foundational building block of a modern portfolio,” Standard & Poor’s and MSCI said when announcing the change.

In a special report, REITs in the Spotlight, Gerstein Fisher Founder and Chief Investment Officer Gregg Fisher said the move represents the first new sector created since Standard & Poor’s and MSCI created the GICS in 1999. He noted that some analysts predict a ‘tsunami’ of tens of billions of dollars of new capital will pour into real estate. Only time will tell if those forecasts will be realized, he said, “but it is easy to imagine that REITs will attract more money from diversified mutual funds, institutional and other investors simply from its higher profile.”

Fisher noted that REITs’ new categorization–distinct from banks, insurance companies and other financial companies–could also reduce REIT correlations with other publicly traded stocks, improve REITs’ liquidity and lower the sector’s cost of capital.

REITs, publicly traded securities that own properties such as office and apartment buildings, shopping centers and hotels, “democratized” commercial real estate investing, Fisher said. “These securities provide investors lacking large pools of capital with exposure and with excellent liquidity to commercial projects and professional real estate management,” he said, calling REITs “an attractive long-term strategic portfolio holding that generates returns that are highly correlated over market cycles with those of private real estate markets.”

Another REIT benefit: they can be a strong hedge against inflation, Fisher said. “Historically, REIT yields have been higher than the inflation rate as measured by the Consumer Price Index and over most extended periods–in stark contrast with fixed-income securities–the income stream from REITs has increased at a higher rate than CPI.” He noted that commercial property leases typically include built-in inflation adjustments.

Fisher discussed whether rising interest rates would negatively impact REIT prices. “Though each scenario is somewhat different…REITs have in fact historically performed relatively well in environments of steadily rising rates–outperforming equities and fixed income,” he said. He noted that rising rates generally coincide with a strengthening economy and rising inflation, both generally positive factors for REITs.