The first U.S. property derivative transactions tied to the National Council of Real Investment Fiduciaries (NCREIF) Index of U.S. commercial property values have been completed. According to DW sister publication Real Estate Finance & Investment, Credit Suisse arranged the trades as part of a broader initiative to provide risk management for commercial real estate investors. The firm has an exclusive contract with NCREIF.
These trades show that real estate investors are ready to adopt property derivatives as a risk management and investment tool, said Jeffrey Altabef, managing director. They will attract non-traditional investors, such as hedge funds or risk-adverse pension plans who want exposure to a sector or property type without actually buying properties. In addition, derivatives trades structured off of the NCREIF index will provide more liquidity and transparency to the market.
In a transaction completed last month, a real estate fund seeking to hedge risk in the apartment sector and add exposure to the office sector entered into a swap to receive the total return on the NCREIF Office Index and pay the total return on the NCREIF Apartment Index. The two-year swap is for USD10 million, Altabef said.
The index is a benchmark of 4,700 U.S.-based commercial properties with an estimated market value of more than USD189 billion. Credit Suisse also structured a transaction in which an investor added USD25 million of real estate exposure by entering into a total return swap that paid the NCREIF Index total return.
The use of derivatives has heated up in the commercial real estate sector, with Citigroup, Deutsche Bank, Lehman Brothers. RBS Greenwich Capital, Goldman Sachs, JP Morgan and Wachovia Securities building real estate derivatives practices.
