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Real Estate Sector Added To S&P 500—What This Means For REITs

S&P 500 has crated a new market sector for real estate, a move that could create an influx of billions invested into real estate stocks

Real Estate has been upgraded to a standalone sector by S&P Dow Jones Indices and investment tool provider MSCI. As of August 31, Real Estate was added as the 11th sector in the S&P 500 Standard & Poor’s Investment Indices. As part of the shift, Real Estate Investment Trusts (REITs) and Real Estate Management and Development will be moved into this category from the financial sector as Equity REITS and Real Estate Management and Development. This comes after a review of the Global Industry Classification Standard (GICS) by S&P Dow Jones Indices and MSCI, who state real estate’s “importance to the global economy” as the impetus for the re-categorization. It is expected this change will draw significant investment away from finance sector into real estate stocks.

Real Estate Investment Trusts

Mortgage REITs will remain in the financial sector under a newly-created industry and sub-industry devoted exclusively to mortgage REITs. This will move the investments out from the shadow of investment banks and insurance companies.

REITs—companies that own and operate commercial real estate and whose are traded on an exchange like a stock—were created by the US in 1960. REITs were established to provide investment structure similar to what mutual funds provided for stocks. Among other requirements, REITs must have at least 100 investors, have at least 75% of its total assets invested in real estate, have 95 % of its income derived from dividends, interest, and property income and pay dividends of at least 90% of the REIT’s taxable income. This last requirement is a major attraction for investors.

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