The decision by financial barometer Standard and Poors to move real estate shares from the financial sector into a stand-alone sector has prompted very different opinions from the financial industry. The decision was made because of the ever-growing interest in real estate investments in the US, and indeed around the world, and will come into play next month. There are also a number of other connected indices which will create standalone real estate sectors. So, what are the pros and cons of this action?
Renewed focus on real estate investments
Real estate investment trusts and traditional real estate companies have attracted growing interest over the last few years in light of worldwide economic challenges. Many investors, both domestic and professional, see property assets as something of a safe haven in these troubled times. It is also becoming fairly obvious that confusion and concern within international markets is creating an array of buying opportunities for those with a long-term investment horizon. So, from this point of view any increased focus on real estate investments and the performance of the underlying sector will be a positive for investors.
One potential issue could be the tracker fund investments which are widely available across the globe. In effect these investment funds mirror the make-up of individual indices such as the S&P 500. Therefore the introduction of a separate real estate sector will see tracker funds forced to disinvest some of their financial sector assets and reinvest into real estate. This could cause some short-term volatility in share prices and create buying opportunities for brave investors. Those looking to benefit from the forthcoming changes will need to have a strong will and ensure their research is accurate and up-to-date.
It will be interesting to see how dividend yields are impacted for those tracker funds focused on the financial sector. Average dividend rates in this sector will be impacted when real estate investments are removed. How will fund managers react to the change? How will they replace the potential loss of income yield?
Is real estate seen as a safe haven?
Historically the real estate market has been seen as a steady performer offering an above-average yield but no fireworks on the capital gains front. In many ways it can be seen as a long-term safe haven, more so in light of the recent worldwide economic downturn, and the view of many investment managers has changed of late. There is no doubt that interest in real estate around the world has increased dramatically, prices have been pushed higher by excessive demand and in many markets investors are ruling the roost as opposed to domestic buyers.
It will be interesting to see how the real estate market performs when the worldwide economy eventually returns to “normal”. Will we see investors switching from this long-term safe haven to more capital gains orientated investments? Have the views of investors changed forever in light of the 2008 economic collapse? Only time will tell but there is no doubt that the real estate sector is a prominent force and it will be for many years to come.