As of this month, real estate stocks have a new home in the S&P 500. REITs have moved out from the broad financial-services sector and into a sector of their own. And with it will come a significant increase in the demand from advisors and investors seeking diversification, and therefore a huge influx of capital into real estate.
The creation of this new sector will result in increased visibility and more attention from institutional investors, individual investors, and financial advisors. This change will present investors and developers with opportunities by essentially reducing volatility and increasing valuations of real estate stocks, including real estate investment trusts (REITs) and exchange-traded funds (ETFs). This new sector should also affirm that allocations to real estate and REITs are viewed as fundamental to a diverse portfolio.
The new sector and attention of new investors could also play an important role in helping to keep CAP rates low and help to continue to drive the current upswing in real estate investment.
While on the plus side, the new asset class may draw attention from new investors, it may also garner greater attention from regulators. A recent Nasdaq article noted that REITs is the ninth largest out of the 11 sectors. According to the Wall Street Journal, the REIT market value was estimated at $609 billion, as of June 30. Market analysts predict that an additional $100 billion or more could be injected into the REITs sector as a result of equity fund managers rebalancing portfolios, according to CoStar. With that kind of investment comes the potential for greater scrutiny and regulation.
Generally speaking, anytime regulations enter into a new market, it can affect the way companies do business over a long period of time. As a developer, the concern is that regulations will stifle innovation and the pace at which a business is accustomed to working at. Just as with the financial services regulations, any imposed regulations on the REIT sector may result in higher spending, which may in turn affect revenue growth and profitability.
Despite potential regulations, the split of REITs from the financial-services sector should have overall long-term positive outcomes for investors and advisors. Volatility could decline and a significant increase in investments into REITs could continue to help push up valuations. The future of REITs will depend on the economy and time will tell, but many signs are pointing towards positive outcomes for the real estate industry.