real estate, a new S&P sector

To any professional investor from abroad, one of the oddities of the S&P 500 and other domestic indices is the relative absence of real estate and construction from them–despite the vast expanse of land in the US and the importance of the sector to the domestic economy.

This situation may be partially one of choice–that large real estate entities in the US have no trouble obtaining bank finance and, because of this, elect to remain private.  It’s also one of the myopia of index makers like S&P, however, which did not allow real estate investment trusts (REITs), the main corporate form of publicly traded real estate in the US, into its flagship S&P 500, until not much more than a decade ago.   Starting in 2001, REITs and other real estate companies have been included, but have been buried in the Financials sector.

a new sector

In the middle of next month, real estate will become truly visible in the S&P 500 for the first time, as the S&P creates an 11th sector to house them separately.

The new categorization would seem at first blush to be little more than paper shuffling, or an opportunity for the S&P to sell new index information.  I think it will have more than symbolic significance, though, both for property companies and for the residual Financials sector (mostly banks and brokers).  For the first time, investment professionals in the US will be forced to explicitly consider in the analysis of their investment performance the effect of their decisions about property and about banks/brokers as separate issues.

In other words, property will be hard to ignore.

I think the change will ultimately raise the level of knowledge about, and interest in, property stocks by American professionals to the level that’s common in the rest of the world.  If I’m correct, it will provide an extra cushion of support for REITs, which until now have been mostly supported by individual investors.  And–who knows?–it may mean that large family-controlled real estate companies will begin to consider public listing, raising the profile of the new sector further.

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