FTSE Group and the National Association of Real Estate Investment Trusts on Monday released a new set of daily indexes of direct property returns that could offer institutional investors, including defined contribution plans and hedge funds, access to direct real estate without investing in properties or with a real estate equity manager.
The FTSE NAREIT PureProperty Index Series is a daily measure of property-level real estate returns based on REIT data that has been delevered and stripped of some of its volatility, said Brad Case, senior vice president, research and industry information for NAREIT, Washington, who helped develop the index.
The current version of the technique was first described in a 2009 paper, “REIT-Based Property Return Indices: A New Way to Track and Trade Commercial Real Estate,” published in a real estate special issue of the Journal of Portfolio Management. It was written by Mr. Case and three people from the Massachusetts Institute of Technology’s Center for Real Estate: Holly Horrigan, research associate vice president of research & industry information; David Geltner, associate director of research; and Henry O. Pollakowski, principal real estate associate.
Their method combines information on REIT property holdings with REIT stock returns to derive information about the underlying property markets.
Values are computed daily based on the stock market prices of constituents of the FTSE NAREIT Equity REIT index, coupled with information on their property holdings and balance sheets. The indexes include U.S. aggregate, regional and property sectors. The FTSE NAREIT PureProperty Index Series provides property-level returns for the apartment, health-care, hotel, industrial, office and retail sectors, and for property markets in all four regions of the U.S. The index series also includes 15 type/region combinations (e.g., East region apartments), as well as a nationwide all-property aggregate
Mr. Case, in an interview, called the release of the indexes a “watershed
“The index solves the problem people had with risk management in commercial real estate,” he said. Investors can use the REIT-based “pureplay” indexes to help make targeted investments by investing in investment strategies based on the indexes, construct hedges and support derivatives trading.
REITs and other listed real estate securities have higher leverage and more volatility than direct real estate, Mr. Case noted.
The indexes are entirely investible, eliminating the need for counterparties in swaps and derivatives contracts, he said. Institutional investors can invest in derivatives products based on the indexes to diversify their portfolios without actually buying or selling properties, thereby decreasing the risk of their portfolios, Mr. Case said.
FTSE-NAREIT is not the first to produce a daily set of direct property indexes.
In October, MSCI Inc. launched its Liquid Real Estate Index. That index aims to mimic direct real estate indexes through deleveraging listed real estate by combining it with an index of short-term inflation-protection bonds and reweighing the securities of a REIT index to reduce volatility.
Peter Hobbs, managing director at Investment Property Databank Ltd., London, a research firm and subsidiary of MSCI, said MSCI’s liquid, replication index is based on the REIT market and “adjusted in a transparent way to get it to track the direct markets.”
“The difficulty with REITs is the underlying leverage,” Mr. Hobbs said. “We take out leverage by adding income instruments that helps smooth the returns to get them to match” the IPD quarterly property index returns” in the U.S. and the U.K.
So far, BlackRock Inc.’s iShares unit has created an exchange-traded fund as a cheap way to get direct real estate that includes a cash mechanism, Mr. Hobbs said.
