REITs Are In A Class All Their Own. Literally.

| About: Vanguard REIT (VNQ)


Exciting changes will soon be ahead for publicly traded real estate companies.

The S&P will be making its first sector expansion in 17 years with plans to add "Real Estate" to its Global Industry Classification Sector.

What is a REIT and what type of investor may it be appropriate for?

On August 31, 2016, the Standard & Poor's index will add an 11th sector to the Global Industry Classification Sector ("GICS") which will be headlined as the Real Estate sector. The GICS, developed jointly by Morgan Stanley Capital International and S&P in 1999, is the leading classification system for global exchange-listed equities and currently consists of 10 major sectors, 24 industry groups, 67 industries and 157 sub-industries. Soon exchange-listed real estate corporations and publicly traded REITs will finally emerge from the shadows of the Financial sector of the GICS and be recognized in a category they can call their own.

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More on this exciting change in a moment. For now, let's review: What is a "REIT"?

Real estate investment trusts ("REIT's") are better defined as corporations that own and/or manage a portfolio of real estate assets. Established by Congress back in 1960, REITs provide investors with a simplistic approach to investing in pools of income producing real estate. To qualify for this distinction, a REIT must distribute 90% of its taxable income to shareholders in the form of a dividend.

Over the course of the past 20 years, we've seen interest rates take a slow downward trajectory and as of recently, yield-starved income investors have relied on REITs as an income alternative to sinking bond returns. Another reason that can be attributed to REITs' tremendous growth stems from their ability to provide liquidity to a relatively illiquid asset class. Publicly traded REIT shares can be bought and sold on an exchange with ease and reflect many of the same attributes of trading a stock.

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REITs may be an appropriate portfolio addition for an investor who is seeking:

Diversification: Most REITs provide investors with the means to spread risk by allocating capital over a portfolio of properties rather than having a heavy concentration of risk in just a few. Healthcare, self-storage, hospitality/lodging, multi-family dwellings and triple-net leases are just a few of the many REIT sub-sector investment choices.

Simplistic Taxation: Annually, REIT investors are provided with a Form 1099 reflecting the tax liability of the investment. In most cases, a REIT is not subject to corporate taxes; dividends received are usually subject to taxes at an investor's ordinary income tax rate.

Liquidity: Investors who are interested in investing in real estate but may require access to their money without time restrictions may prefer investing in publicly traded REIT's.

In summary

The expansion of GICS sector classifications -- the first since its inception -- makes this newly formed real estate sector hard to ignore. And REIT enthusiasts globally are pleased and encouraged that this asset class has made it to the big leagues.

The GICS Real Estate sector is positioned to educate a brand new investor base and could likely attract many investors who may have shunned REITs in the past. Even though the majority of the US property market is still held privately, based on the trends of the next few years, investor demand could create a mushroom effect as more options become available and a plethora of companies look to raise capital and attract investors by listing publicly.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: SA Editor Robyn Conti reached out to me via my insta-blog submission and thought this was a timely and informative article.