You can now short private real estate markets

Financial firm GIG partners with CBRE on synthetic hedging tool

In a year of uncertainty, professional pessimists finally have a tool to short the private real estate market.

Financial services firm Global Index Group on Wednesday launched a synthetic investment product tied to the performance of the NCREIF Index, which tracks the return on privately held real estate in the U.S. As with traditional swaps, customers can choose to go either short or long. CBRE Capital Advisors, CBRE’s investment banking arm, is selling the product, dubbed duETS (short for Down/Up Equity Trust Securities).

There are already plenty of products that allow investors to short publicly traded real estate investment trusts or mortgage securities. But private real estate markets lacked that option despite a few short-lived attempts at creating them. The problem is that it’s easy to buy or borrow (the equivalent of going long or short) REIT stocks or CMBS at a moment’s notice. It’s a lot harder to buy buildings.

Here’s how GIG, which develops index-based financial products, is trying to solve the dilemma: duETS buyers don’t actually invest in real estate. They are basically gambling on the performance of the NCREIF Index. The money they spend gets converted into treasury bonds. Bank of New York Mellon holds the bonds, acting as a sort of casino bank. After a period of up to two years, the bank sells the bonds and the investors get their payout, including interest. If their bet was a good one, they’ll get more back. But it’s a zero-sum game: one investor’s gain is another one’s loss. In the interim, they are free to sell their duETS positions to other institutions (duETS is open to financial firms with over $100 million in assets under management).

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“We think REITs are a fine instrument but if you look at the total real estate market it’s less than five percent,” said GIG’s CEO Kelly Haughton. Tying investment products to the NCREIF Index allows investors to bet on a bigger part of the market, he argued.

DuETS’ launch comes at an opportune time. With interest rates set to rise, the market cycle possibly nearing an end, and an unpredictable man in the White House, the is more uncertainty than ever.  This should increase demand for shorting and hedging tools.

“I think that for us the important thing is if there’s a variety of opinions about what’s going to happen,” Haughton said. He also argued that viable hedging tools are the hallmarks of an efficient market, and should help prevent asset bubbles.

CBRE Capital Advisors’ Phil Barker said he hoped duETS will open the private real estate market to new investors. “It will enable non-traditional players to participate, like hedge funds,” he said. “This is something of a game changer.”