Real Estate Investment Trusts (REITs) Take the Spotlight on Wall Street

Kathy Fettke

Kathy Fettke

A small change on Wall Street that could have big implications for real estate investment trusts. The new plan will thrust REITs into the spotlight and possibly attract billions of new investment dollars.

The S&P 500 will be taking real estate stocks out of the financials group and placing them in their very own sector. That’s expected to make the real estate investment field much more visible to potential investors.

The new real estate sector will be called “Equity Real Estate Investment Trusts”. Right now, the S&P 500 has 10 sectors. The new real estate sector will be the 11th. It will be the second smallest category, just ahead of the telecommunications sector. Twenty-five companies are expected to move into this new sector.

This won’t include Mortgage REITs, which will remain in the Financials Sector.

CNBC reports that while it appears to be a cosmetic change, the impact could be significant. The network reports that, “Most Wall Street experts foresee a substantial inflow to the new sector, with particular focus on real estate investment trusts.” The Street says it may simply arouse investor curiosity, especially those who may have overlooked these investment choices previously.

In other words, real estate related investments will suddenly be thrown into a new spotlight and that will likely increase demand for those investment products.

But exactly how much of an impact are we talking about?

There are reports that JPMorgan Chase is estimating this simple change could pump $100 billion dollars into the new real estate sector. That’s a lot of dough and quite a bit more than estimates by a few other financial institutions. Goldman Sachs is reportedly putting that figure at $19 billion and Bank of America is saying $8 billion.

So the numbers vary wildly but it appears that the overall opinion is that it will increase the amount of money pouring into the real estate arena on Wall Street.

CNBC says there are two good reasons to expect money to flow into the new sector. One is that portfolio managers will have another sector to help diversify their portfolios. Second, the network says that many portfolio managers are light on financials to begin with, and that pulling real estate away from banks and insurance companies could give them an attractive alternative.

The Street also says the move will help educate investors. They say it will help clarify the difference between real estate investment trusts and financial companies, like banks.

It explained that REITS flourish during a strong economy with higher home prices and rents, and also when occupancy rates are low. It says that stocks for banks and insurance companies depend on the demand for loans and higher interest rates.

One market expert told CNBC that investors may want to focus more on exchange-trade funds that track the real estate sector instead of individual REITS or stocks.

Strategist Nick Colas of Convergex says that ETF’s are already experiencing an uptick well ahead of the launch of this new sector.

This big change is set to take place on August 31st.

But we must remember that real estate involves many sectors – commercial, residential and retail, just to name a few. They don’t all run on the same cycle.

For example, some big name retailers have had disappointing quarterly results, so some mall real estate investment trusts could be in trouble.

The FTSE NAREIT regional mall index is heading down, after department store operators such as Macy’s and Nordstrom reported lower-than-expected earnings. There are concerns these anchor stores may start to close like so many other big box stores have this year.

High-end malls have been more resistant to store closings in the past since they attract retailers who are able to pay higher rents. However, big losses in the energy sector and the rough start to the stock market this year, appears to be hitting the high-end this time around.

Everything we used to believe in the past is now changing. Just because a Nordstrom or Macy’s was a solid, resilient anchor store in the past, it may not be in the future.

That’s because decade-old spending patterns in the U.S. are changing. Baby Boomers, who are now the second largest generation today, are retiring and spending less than they have in 4 decades.

Their kids, the Millennials, now the largest generation in the U.S. are not ready to mimic their parent’s spending habits. They are just getting started in life. Plus, these younger people tend to shop online – where they can find exactly what they want, in the right color and size – for the lowest price.

It will be important to pay close attention to the economy as we go through these demographic changes.

Kathy Fettke