New Group Formed to Promote Use, Understanding of CRE Derivatives

An industry alliance of institutional investors, portfolio managers, index providers, banks, brokers and others associated with U.S. commercial property derivative products has launched to help promote the use of the investment tools more commonly seen in Europe.RED-SIG, which stands for The Real Estate Derivatives Special Interest Group, “aims to provide

An industry alliance of institutional investors, portfolio managers, index providers, banks, brokers and others associated with U.S. commercial property derivative products has launched to help promote the use of the investment tools more commonly seen in Europe.RED-SIG, which stands for The Real Estate Derivatives Special Interest Group, “aims to provide easy, free access to useful and important information for any investor considering real estate derivatives in their portfolio,” said Phil Barker, vice chair of the group and senior vice president-real estate derivatives at CBRE/GFI in New York City.“The market hasn’t adopted these applications as well as they have in other countries, especially in Europe and particularly in the United Kingdom,” Barker told CPN this morning. “Commercial real estate derivatives offer investors a new set of tools for obtaining exposure to the real estate markets, and for managing the risks inherent in their portfolios.”Barker said more than $23 billion was traded in commercial property derivatives globally last year, about $500 million of that coming from the United States. The market had been expected to grow in the U.S. in 2007 after the National Council of Real Estate Investment Fiduciaries (NCREIF) granted licenses last March to several investment banks to use the NCREIF Property Index as a benchmark for structuring derivatives. The U.S. commercial real estate market was the only major asset class not being supported by a robust derivative market, Barker noted. Referring to the credit crunch and uncertainty in real estate markets in 2007, Barker noted that 2007 “was a difficult year for the market in general and for derivatives in particular.”He said higher use of property derivatives in the U.S. might have mitigated some of the problems resulting from the subprime meltdown. “These products enable portfolio managers to maintain the size of their portfolios in declining environments and still receive positive returns,” Barker said.Barker noted that derivatives are “much more liquid products, so you can get in and out,” more easily than buying buildings or properties. He acknowledged that uncertainty has caused nervousness in the commercial real estate market and returns are down, even for derivatives. Just a year ago, returns were estimated at around 8 percent for the first year and 16 percent for two years. Six months later, returns are estimated at minus 3 percent for the first year and minus 6 percent total. Barker said property derivatives can offer a sort of “insurance policy” in an uncertain market by offering fixed returns. The group’s web site, www.red-sig.org , will offer information. He said members of RED-SIG also plan to sponsor some one-day seminars or work with other industry groups to explain more about the property derivatives and their uses.