There is a new tool for shorting a very volatile private real estate market in the United States.
Global Index Group (GIG) and CBRE Capital Advisors are offering Down/Up Equity Securities or duETS. duETS are securities that track the NCREIF National Property Index, the hope is that they will go up and down with real estate prices. The reward is keyed to a 2X multiplier effect based on index movements between valuation dates, a GIG press release indicates.
Risk is limited by actively controlling market exposure and investing in commercial real estate on a national basis. The hope is to be able to hedge current real estate pricing exposure while locking in appreciation. Each duET is a basket of cash and U.S. Treasury bonds, the cash will be invested in commercial real estate via private equity.
Funds generated will be invested in U.S. Treasury bonds held by Bank of New York Mellon, The Real Deal reported. The bonds will be cashed out every two years but investors can sell the duET at any time.
New Index Product Available
duETs will be available to Qualified Institutional Buyers and offshore investors, GIG revealed. The Real Deal reported that financial firms will need over $100 million in assets to invest in duETS.
Some details about duETS; including the investment formula and who or what makes the investment decisions, were not revealed. The Real Deal described them as a synthetic investment product which means algorithms, robotic process automation or artificial intelligence might be involved.
“It will enable non-traditional players to participate, like hedge funds,” CBRE Capital Advisors’ Phil Barker said of duETS in a statement to The Deal. “This is something of a game changer.”
U.S. Commercial Real Estate Market Getting More Volatile
duETS might be coming at the right time because the U.S. commercial market is becoming increasingly volatile because of changes in retail. Credit Suisse Group AG Analyst Christian Buss estimated that 8,640 stores will close in the United States in 2017.
If Buss’s prediction is true the number of store closings will exceed that in 2008 at the height of the last financial crisis, Market Mad House reported. Four large US retailers; Macy’s, Payless Shoes, Radio Shack and Sears, each have plans to close over 100 stores.
Not surprisingly the mass extinction of retailers is playing havoc with the commercial real estate market in the United States. Terra Capital Partners chief executive Bruce Batkin admitted he turned down a chance to refinance a shopping centre because the property’s owner wanted a 10 year loan in an interview with The New York Times Deal Book.
“Things are changing so fast in retail that a year needs to be measured in dog years,” Batkin said. He also thinks that retail space in the United States is overbuilt.
American retail might be at a “tipping point” and a paradigm shift because of the havoc being wreaked in the sector by the rise of ecommerce and Amazon, Deal Book reported. Its writers found that rents were softening in some prime retail space in Manhattan; while demand for warehouse space in Brooklyn was increasing because of ecommerce growth.
The situation is made worse by some of the deals desperate landlords are making to fill space, The Real Deal reported. A popular concession is several months of free rent, others include lower rates.
The concessions have become so pervasive in Manhattan and Brooklyn in New York City that they have rendered market rate rents meaningless, sources told The Real Deal. One result of this is that some tenants are unable to pay the actual rents.
Such giveaways are already scaring banks which base refinancing on gross rents, The Real Deal noted. That might lead to higher interest rates, and more non-traditional loans.
The growing volatility in the U.S. commercial property market is sure to have dramatic effects on real estate indexes. Investors had better take note.