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A synthetic product to go long or short on private real estate

by Loretta Clodfelter

Global Index Group has developed a product that allows investors to capture private real estate performance, as well as to short private real estate. The platform was designed to work with any private real estate index, with the first offered product based on the NCREIF Property Index, says Kelly Haughton, CEO of Global Index Group, a 30-year veteran of the indexing industry and the creator of the Russell Investments index family.

CBRE Capital Advisors recently signed on as the exclusive broker for the Down/Up Equity Trust Securities, and the first product, duETS U.S. Commercial Property 2X, is tied to changes in market for value of the NPI with a 2x equity multiplier. The “duETS” product will sell equal amounts of “down” and “up” shares, matching up investors who want to go long or short the private real estate market. Other duETS are being developed with increased multipliers.

Haughton explains counterparty risk is mitigated, as the funds are put into trust by Global Index Group and invested in Treasuries for the length of the holding period. Previous derivative products targeting private equity real estate have been stymied by concerns about counterparty risk, according to Haughton. As equity-class securities, the product also will be tradable on a secondary basis under Rule 144A.

Comparing the product to investing in direct property, Haughton says, “it’s not more complicated; it’s just different.” He says interest in the product has included hedge funds looking to make a bet on the private property market or hedge commercial real estate debt exposure, such as CMBS holdings; banks interested in a product that may qualify as Tier 2 capital with the benefit of an embedded real estate component, and offshore investors who want exposure to U.S. core real estate but in a more tax-advantaged fashion.

The product also is designed to appeal to institutional investors who want to efficiently hedge their real estate portfolio equity price risk or might want immediate exposure to real estate while they wait for their property fund commitments or direct property investments to be drawn down. And, as the real estate investment industry evolves to work with defined-contribution pension funds, it also could provide part of a liquidity wrapper for a private real estate component of a target-date fund.

One challenge is that, because the product matches buyers of the long and short positions, Global Index Group and its broker-dealer, CBRE Capital Advisors, have to find buyers willing to take positions in each side of the duET security. But, Haughton says, “prices are driven by market forces,” which will allow the trading levels of the down securities and up securities to adjust, based on demand and supply.

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