Property sector companies are to be removed from the financials group in the Global Industry Classification Standards (GICS) and placed into a newly created real estate classification, a move which Ord Minnett sees as positive for the sector.
This change will take effect after the close of business on 31 August 2016, and is the first additional sector added since the GICS classification system was created in 1999 by Standard & Poor's and MSCI.
The real estate sector will comprise property trusts, as well as real estate management and development companies, including the likes of Lend Lease and Aveo. Overall, the property sector currently comprises around 9% of the Australian market, although interestingly, it has a higher weighting of 9.8% in the S&P/ASX 50 Index and 12.4% in the Small Cap Index.
The index providers cited property's growing role as an asset class in the global economy and the market's (and Ord Minnett's) perception of real estate companies as being fundamentally different from other companies in the financials sector.
Ord Minnett sees the move to a separate real estate classification as a positive driver for demand for property stocks.
Active general equity funds have perennially been underweight the property sector in Australia and used this position to be overweight other financial stocks such as the big banks. But with property removed from the financials classification, significant underweight positions will be exposed.
Given that Australian long-only active managers (which our strategists see as making up 30-40% of the overall market) are nearly all underweight REITs, it follows that the classification change will ultimately drive flows into real estate stocks as many funds increase their weighting to the property sector.
Ord Minnett sees the index change as being more positive for growth-focused stocks in the sector, such as Lend Lease or Westfield Corp, as we believe general equity investors are more likely to increase holdings in these companies, than for the more passive stocks, such as Scentre and Vicinity Centres. Small-cap property stocks will also likely benefit given the large weighting they have in the Small Cap Index.