Handbook of Finance: Financial Markets and Instruments

Chapter 51. Commercial Real Estate Derivatives

JEFFREY D. FISHER, PhD

Dunn Professor of Real Estate, Indiana University

DAVID GELTNER, PhD

George Macomber Professor of Real Estate Finance, MIT

Abstract: Despite the tremendous growth in the use of derivatives for commodities, stocks, interest rates, currency and other applications, the availability of derivatives for commercial real estate has been limited. When you consider that real estate assets comprise over one-third of the value of all of the underlying physical capital in the United States and the world, the potential for real estate derivatives is impressive. It is therefore not surprising that in recent years real estate derivatives have begun to develop, as market participants have realized the role that derivatives can play, investment banks have been willing to offer derivatives, and new indices have been developed that are designed to meet the needs of the evolving real estate derivatives market.

Keywords: derivatives, forward, swaps, indices, hedge, alpha, short, structured notes, counterparty

This chapter discusses the type of derivatives now being offered for commercial real estate including total return swaps, forward contracts, and structured notes. Such products address several of the classical problems that have been raised regarding real estate investment, including: high transactions and management costs, lack of liquidity, inability to sell short, and difficulty making well-diversified property investments whose ...