Real Estate Derivatives: It's Our "dot-com" Time

Journal of Real Estate Portfolio Management, Jan-Mar 2008 by Valente, James

Indices (Credit)

Investors need a better understating of credit default swaps and how these are impacting the pricing of commercial real estate. Active real estate investors over the past six months know there has been an impact. Additionally, since real estate equity investors are long credit, similar to commercial banks, how can they use credit default swaps to manage risk against a tenant, a basket of tenants, or the credit specific to a geographic market? Can you create a synthetic lease with credit default swaps? What does this look like when "stapled" to a property? The products are out there, but do they provide an economic benefit?

Conclusion

Real estate researchers, practitioners, and investors are clearly at an inflection point with regard to how we think about and price assets and invest capital. There is a significant amount of research that yet needs to be done with regard to derivatives and real estate investing, and the data is actually becoming available as the fledgling property derivatives market develops in the U.S. and around the world, and large and liquid credit default markets change pricing over night when a shock roles through the financial system. But there needs to be a better link between the academic world and the people actually responsible for making significant investment decisions to ensure that the research is relevant.

by James Valente*

* Broadway Partners, New York, NY 10152 or jvalente@ broad waypartners.com.