A new market is in the works for US real estate derivatives as CBRE Melody/FI, the collaboration between derivative broker GFI Group Inc. and mortgage broker CBRE Melody, create an over-the-counter derivative market based on US real estate indexes.
Real estate is currently the largest asset class that does not offer derivatives, according to the firms. A new market could allow participants more risk management and trading opportunities and reduce transaction costs and lead times.
The derivative would be a total return swap on commercial or residential property indexes. Capital appreciation swaps, options and futures structures would also be offered.
“[Real estate derivatives] may not see the same meteoric growth, but we do feel that in the past there hasn’t been a mechanism to trade on a derivative level without trading the underlying,” says Phil Barker, vice president of real estate derivatives for GFI. “REITs have been around, but they don’t trade the same way.”
CBRE Melody/FI has based the derivative after the UK model that launched in 2005, says Barker. The market is expected to reach between 3 billion and 4 billion this year. However, the firms are more optimistic about the US launch because “the higher underlying values and geographical disparities” will create more opportunities.
“My suspicion is that smart guys will be able to analyze what real estate prices are doing, what fixed-income rates are, and where economic numbers will be, and also have the ability to use this to trade against things such as the weather-hurricanes, for example,” says Barker. “It will certainly be of interest to the hedge fund world, as they have the ability to analyze the marketplace and arbitrage value.”
A three to five year timeline has been set for the maturation of the real estate derivatives market, say the firms in a press release.