The futures of real estate

By Jonathan Keehner - Analysis

NEW YORK (Reuters) - U.S. brokers and exchanges are close to breaching an impasse that has prevented property derivatives from being widely available here, a step likely to be welcomed by increasingly jittery real estate investors.

While investors in nearly all other major asset classes enjoy the utility of a derivatives market, often to hedge their risk, those in fragmented and opaque U.S. real estate markets largely have not.

But access to real estate indexes is adding U.S. commercial and residential property ownership to the list of items, from companies' debtworthiness to the weather, that investors can speculate on through listed and over-the-counter markets.

Property derivatives are already widespread overseas, where the market for products linked to London-based Investment Property Databank indexes totaled 4.7 billion pounds ($9.2 bln) at year end. IPD's database has over 12,000 properties, or about half of the total property assets of U.K. institutions and listed property companies.

U.S. real estate, with over $270 billion in 2006 transactions according to Jones Lang LaSalle, has lagged behind for reasons including a lack of liquidity and reliable metrics.

"Each piece of property is unique so it's been hard to come up with measures that allow markets to be looked at on a macro basis," said Stephen Berkman of law firm Winston & Strawn LLP. "I think we're finally getting to where the information is being gathered and people trust the results."

In one move aimed at boosting liquidity, Credit Suisse Group (CSGN.VX: Quote, Profile, Research, Stock Buzz) recently relinquished its exclusive license to structure derivatives based on a property index compiled for nearly 30 years by the National Council of Real Estate Investment Fiduciaries.

The NCREIF Property Index (NPI) is an appraisal-based index measured quarterly, with nearly 5,500 institutional properties and a market value of about $250 billion at year end.