Indexes Continue to Evolve
Fifty years later, the FTSE Nareit U.S. All Equity REIT Index remains the default REIT benchmark for many analysts, investment managers, and investors. It also serves as the basis for many market-weighted REIT funds. “The index performance of that benchmark drives a lot of the narrative about REITs and the fund flows,” says Alex Pettee, president and director of research & ETFs at Hoya Capital Real Estate.
At the same time, the FTSE Nareit indexes have continued to evolve with new informational products that reflect the changing industry. “More so than any other equity sector, I think the importance of the indexes is more paramount in the REIT sector,” Pettee says. REITs are the most passively owned asset class, meaning the most index-driven asset class. “I think that’s largely because the index model has been so successful in REITs,” he says.
The pre-modern REIT model featured a larger number of diversified REITs. Indexes that showed REITs through a narrower lens of a property sector (a concept initiated by Nareit in 1993) have helped to shape how the sector grew in the modern REIT era. “If it hadn’t been for these indexes and the different ways to slice and dice the real estate sector, I don’t know if it would have evolved in the same way,” Pettee says. The property sector classification is what drives the REIT research at Hoya Capital. From the REIT perspective, it also makes sense to be included in one of these property sectors, because they tend to get more analyst coverage than those that don’t fit neatly into one sector, he adds.
Industry expansion beyond the core property types is reflected in growth of the indexes, and the FTSE Nareit U.S. series has traditionally been a little faster to adopt new property sectors, such as health care, self-storage, timberland, data centers, and infrastructure (including cell towers).
For example, data centers and cell towers have become critically important among REITs, now representing more than 20% of the FTSE Nareit All Equity REITs Index. FTSE, Nareit, and EPRA added data centers as a property sector to the global index series in 2019, and in 2021, FTSE Russell launched the FTSE EPRA Nareit Global Extended Index Series, which extended coverage of the standard benchmark by adding cell tower companies.
“It is this idea that as we are increasingly moving to a more digital economy, real estate is tracking that and making sure that the indexes stay up to date with the underlying real estate that houses the economy,”Worth says.
Another new addition in 2021 was the launch of the FTSE EPRA Nareit IdealRatings Islamic Index Series. In its Islamic Series, FTSE works with IdealRatings, which screens members of the FTSE EPRA Nareit Global Extended Index for Shariah principles. Initial demand for the global Islamic real estate indexes was driven by a U.S.-based asset manager seeking that type of investment mandate for international clients. Since then, there has been interest in the Islamic Index Series from other clients both in the U.S. and internationally, Yoshimoto notes.
“Client preferences are trending towards more coverage and more choice in terms of the ability to choose different exposures,” Yoshimoto says. “Once we have that initial index, then clients tend to look at what other screens they can apply, and we continue to discuss with clients what additional indexes we can provide for them.”
FTSE and Nareit also are working to develop products to satisfy the growing global demand for investment information that tracks performance of sustainable strategies. According to a research report published by the Global Sustainable Investing Alliance, global sustainable investment had reached $35.3 trillion at the start of 2020. In recognition of the demand for more benchmarking products, FTSE, EPRA, and Nareit introduced its Green Index series in 2018 that allows investors to identify real estate companies with strong sustainability performance.
For example, the FTSE EPRA Nareit Developed Green Focus Index as of November 2021 contains 292 constituents from 21 different countries. Constituent weights are adjusted (tilted) based on two sustainable investment considerations—green building certification and energy usage. “As we go forward, one of the expectations is that we will be generating more ESG-oriented products, both for the U.S. and globally,” Worth says.
Following Key Trends
The REIT indexes also continue to expand beyond property sector and geographic region with new products being developed around key themes such as e-commerce.
The FTSE Nareit New Economy Index, which launched in December 2020, offers a digital economy investment play within real estate. The 16 constituents are listed REITs from the infrastructure (which includes cell towers) and data center sectors, as well as industrial/logistics REITs that are involved in supporting the e-commerce economy such as communications, data centers, and logistics real estate.
The FTSE Nareit New Economy Index represents a formidable category with a market cap of roughly $495 billion—about one-third the size of the $1.47 trillion market cap of the FTSE Nareit All Equity REITs Index as of November 30, 2021. “Again, it is this idea that as we are increasingly moving to a more digital economy, real estate is tracking that and making sure that the indexes stay up to date with the underlying real estate that houses the economy,” Worth says.
Indexes also warrant credit in helping to attract some of the capital flowing to tech investments. For example, the Pacer Benchmark Data & Infrastructure Real Estate Sector Index (SRVR) was one of the first ETFs that targeted data centers and other tech REITs. Now with a market cap of about $1.6 billion, that fund has done extremely well in attracting a large base of investors, Pettee notes. There are now more vehicles that invest in these niche sectors, such as tech REIT funds or net lease funds or residential. “That is the innovation that we’re seeing most prominently. You’re seeing these property sectors put into investable products,” he says.
