Traditionally commercial real estate was owned by private individuals or institutions.The nature of real estate as a high cost, durable asset made it particularly desirable as a long-term investment by organisations such as insurance companies and high net worth individuals. Due to the relatively high transaction costs and the highly localised nature of the investment, real estate has never traded as frequently as financial assets such as stocks and bonds.

When real estate does trade, the markets for its transfer have historically been fragmented and idiosyncratic. As a result real estate was seen as an illiquid investment.

Though real estate assets are somewhat similar in fundamental character (e.g. a structure for work or residence), the distinction by location renders real estate much less than perfectly fungible. Real estate has generally been considered as an inflation hedge and is virtually impossible to sell "short".Hence real estate evolved into an asset class that most investors considered to be quite separate from other types of assets.

Real estate investors have historically accepted real estate's lack of liquidity and typically were relatively indifferent to knowing its "value" at every instant in time. The valuation of real estate was really important to the owner only when they sold the asset or borrowed money that was secured by the property.

The perception of property began to change in the U.S. in 1992, when the modern era of REITs was born. Over the next few years private real estate portfolio’s were transformed into public securities at a rapid rate. This transformation was essential in creating a level of liquidity for real estate assets.

Over the past two decades the description of “real estate” has been expanded to include many more liquid vehicles of real estate performance: listed real estate equity, real estate debt, structured debt such as CMBS, property derivatives, private equity and PE secondaries. Globalisation has accelerated this change, as invested have insisted on exposure to real estate that can be readily traded and valued.

Indexation of real estate has become more common-place. The dinner table conversation has always included real estate market banter,  it used to focus just on how much the house down the road sold for. It now often includes reference to the Halifax, or the Case Shiller index.

The Commercial Investment Property market (non-owner-occupied) is now demanding more transparency, Investors want to know how properties held by the property companies they have invested in perform against their peers. This has resulted in a proliferation of indexing companies. Investment Property Databank (IPD) is at the forefront of  this industry. The main business of IPD is Property Portfolio analysis on commercial property investment funds. This gives property fund managers and investors fair benchmarks for total returns, plus a full evaluation of investment strategy and property portfolio analysis quality. From this information they are able to produce indices and market information to give the definitive statement for property returns in each country and each city. This provides a consistent basis for comparison with other assets, and for research that informs real estate investment decisions from international property portfolio allocation down to individual building selection.

Financial services companies such as Standard & Poor’s and Moody’s and FTSE  have formed liaisons with residential and commercial index providers and provide both equity level property indices and direct property level indices, there are also an array of indices providing property debt performance.

This site attempts to act as a resource for the newly labeled “Liquid Real Estate”.

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PropDerivatives was developed by Philip Chew. Philip has spent most of his career in the fixed income and credit markets, until he was asked to help promote a fledgling asset class, property derivatives in 2007. The market was entering a period of growth in the UK, the first trades were being done in U.S. and Asia, led by Hong Kong, Japan and Australia, was starting to take notice of the product. Real estate and financial markets had developed as two different systems. Education was needed for both sides. A financial markets practitioner would have to learn the valuation tools and practices of  the real estate market, while a real estate professional would have to be made aware of the techniques and tools of the financial markets.

To this end a property derivatives group was formed on the social networking site Linkedin. The group has nearly 6,000 members. They come from a variety of backgrounds: corporate real estate, real estate funds, mortgage professionals, fixed income, structured products, lawyers, academics, the list goes on. There has been some valuable debate, and there will be more as this the product matures. Property derivatives is just part of a matrix of instruments that can represent real estate market performance in different ways.

Input from visitors to the site would be greatly appreciated, whether it be suggestions for the layout or for further content. Any articles or theses should already be published on the internet, to avoid any copyright infringement. If the contributor has rights to the paper in question then express permission to use the piece would be appreciated.

Please contact: info@propderivatives.com

Thank you.